Tracking gross or net portfolio value

[drr1099]

So I was thinking that depending on the portfolio composition, how much of it is Roth, basis, tax-deferred, etc, a person has a certain effective amount. A million in Roth is really a million. A million in traditional IRA is probably less. It is reasonable to assume that most people will pay at least 12% on that money. So I started tracking a new metric that I call the gross value of the portfolio. What I do is I assume a conservative tax rate of 12% and all Roth, basis, and cash are inflated by 12%. Then I add all tax-deferred funds and I come up with a value of a portfolio as if it consisted enirely of pre-tax funds. Alternatively, someone could instead tax all the tax defered funds and gains and come up with a net after-tax value. Of course this is highly approximate, but do you think this is a useful measure that basically allows you to compare amounts in different buckets apples to apples while also showing you that you may be closer to your goal than you think.

[magicrat]

This sound useless to me. Primarily because your assumptions are wrong - taxes are complicated. This tells me nothing except the answer to an arbitrary math problem.

[dbr]

There is a Wiki article on this: https://www.bogleheads.org/wiki/Tax-adj ... allocation.

I personally don't think this is much helpful. Do track down and read the Reichenstein papers in the references for some financial analysis.

Also see here: https://www.google.com/search?sitesearc ... x+adjusted 71,600 posts on the forum.

[4nursebee]

So I was thinking that depending on the portfolio composition, how much of it is Roth, basis, tax-deferred, etc, a person has a certain effective amount. A million in Roth is really a million. A million in traditional IRA is probably less. It is reasonable to assume that most people will pay at least 12% on that money. So I started tracking a new metric that I call the gross value of the portfolio. What I do is I assume a conservative tax rate of 12% and all Roth, basis, and cash are inflated by 12%. Then I add all tax-deferred funds and I come up with a value of a portfolio as if it consisted enirely of pre-tax funds. Alternatively, someone could instead tax all the tax defered funds and gains and come up with a net after-tax value. Of course this is highly approximate, but do you think this is a useful measure that basically allows you to compare amounts in different buckets apples to apples while also showing you that you may be closer to your goal than you think.

Seems too complicated.

Prior to retirement I saved receipts and calculated monthly needs. Then I added in for insurance and taxes. I assumed 5% state, and potential marginal federal rate of 25%. So, for X in needing 20-30X, I used the total amount needed = expenses+taxes+insurance.

Perhaps saving all those receipts was complicated but I needed to KNOW for peace of mind.

But you are right in being able to calculate Roths as not being taxed.

[HomeStretch]

I use gross amounts as tax rates (and estimated net amounts) may change over time.

I do track cost basis. At year-end, I do a high level summary of my portfolio (cash, ibonds, brokerage taxable accounts, PE investments, Roth total, tax deferred total) with 12/31 market value, cost, and unrealized gain/loss for each line item. It’s a good reminder of my embedded gain that is subject to future income taxes.

[rkhusky]

Seems like subtracting from tax-deferred would be a better approach. It can help in fine-tuning your asset allocation, but seems more useful in a higher tax bracket.

[nisiprius]

Because of the uncertainty of the future value of stocks... and other securities... and practically anything... I don't think it's worthwhile doing this precisely in a tracking spreadsheet.

When I think of the size of my portfolio, I actually do make a mental calculation in which I subtract roughly half the value of my stock holdings, on the assumption that the current market value could well be much higher than the value at the moment when I need it. I did that pretty systematically when I was trying to gauge my savings progress while I was saving for retirement.

Yes, I do make some vague mental allowance that the usable value of my rollover TIRA has to be discounted for taxes. But I don't try to calculate it.

I think the community of financial writers and planners just goes nuts with wishing to calculate things that are too uncertain to calculate, and playing mind games and mathematical games in which they say "well, let's try to model it, let's try to use numerical estimates instead of just giving up, always better to put in some kind of number." Then they build models on a quicksand of educated guesses. Then they say "Look! That model is so complicated it takes an expert to run them," and they run them and exhibit the result to three significant places while concealing the fact that the input numbers were only good to one significant place.

[Flashes1]

KISS

The only time I would worry about valuing a Roth vs. a 401k is if I was divvying up money in a divorce. For retirement purposes, I assume a total combined tax rate (fed/state/local) of 28% of old 401k withdrawals......as an expense.

[Stinky]

Alternatively, someone could instead tax all the tax defered funds and gains and come up with a net after-tax value.

This is what I personally do.

So, for example, as I make Roth conversions which cause me to pay taxes on the converted amount, my measure of “net worth” does not change. That’s because my net worth calculation has already considered the “deferred taxes” embedded in my traditional IRA.

I realize that this is not the majority opinion on this Forum. And that’s just fine.

[afan]

When I think of the size of my portfolio, I actually do make a mental calculation in which I subtract roughly half the value of my stock holdings, on the assumption that the current market value could well be much higher than the value at the moment when I need it.

I do the same thing. I discount by the loss required to bring CAPE10 back to its long term mean. Right now, this is 50%.

I agree that is possible that changes in the economy and accounting standards may mean that this measure should be somewhat higher than in the past. I do not have the data or accounting knowledge to have an opinion on how much to adjust for that. So I ignore it and simply assume CAPE10 values mean the same thing now as they have in the past.

For spending purposes, I account for taxes when I simulate taking RMDs but I do not adjust networth for this exercise. The level of taxation is too complicated for this to be meaningful. Lower amounts in tax deferred accounts would mean lower RMDs, which would mean lower tax rates.

For estate planning I have to use the full statement current values because those will determine estate taxes.

[madbrain]

A million in Roth is really a million.

Nope. Only if it contains zero or negative earnings. You may owe 10% federal penalties on withdrawals of earnings before 59.5, for instance. CA even adds 2.5% penalty. If you become disabled under SSDI, the penalties don't apply regardless of age.

Taxes are really complicated. Brackets change every year. Your age can change the penalty rate. Your health changes it, too.

I don't see value in estimating taxes at the entire portfolio level. I do see value in estimating the annual tax drag based on planned withdrawals.

[mptfan]

A million in traditional IRA is probably less. It is reasonable to assume that most people will pay at least 12% on that money.

That is not reasonable to assume.

[Svensk Anga]

Alternatively, someone could instead tax all the tax defered funds and gains and come up with a net after-tax value.

This is what I personally do.

So, for example, as I make Roth conversions which cause me to pay taxes on the converted amount, my measure of “net worth” does not change. That’s because my net worth calculation has already considered the “deferred taxes” embedded in my traditional IRA.

I realize that this is not the majority opinion on this Forum. And that’s just fine.

I will join you in the minority opinion. When making Roth conversions, one has to consider the impact on one's future after-tax wealth or it makes no sense at all to convert. If you look only at gross, Roth conversions just make the pile smaller by the amount of the taxes paid in the year of conversion.

My retirement planning spreadsheet calculated future after-tax wealth and I tried to optimize that.

Also, assuming a marginal rate to deflate the tax-deferred portion is too simplistic. I have been converting to the top of the 25% then 22% brackets since I retired. My marginal tax cost has been noticeably smaller than my marginal rate since some conversions used space in the 10, 12 and 15% brackets.

[mptfan]

Also, assuming a marginal rate to deflate the tax-deferred portion is too simplistic. I have been converting to the top of the 25% then 22% brackets since I retired. My marginal tax cost has been noticeably smaller than my marginal rate since some conversions used space in the 10, 12 and 15% brackets.

You also have space in the standard deduction or itemized deductions (and other above the line deductions such as IRA contribution and HSA contribution deductions) before your taxable income is even used to calculate your tax within your brackets.

[capran]

I try not to make things more complicated, but under our tIRA balance in excel, I have two numbers. One is the real time (monthly) balance of the tIRA. And just below it I have a second number that deducts 22% of that tIRA, because that is a close approximation of the taxes that will be paid as it gets converted to Roth. (Yes, I know there is effective, marginal and actual tax calculations, but it is enough for me to use 22%, since i use the MFJ section B (page 77 instructions sheet) that says "taxable income if line 15 is at least 100k but not over 190,750" , enter said amount from line 15 and multiply it by .22". I know that is not precisely correct, since column d has you enter a subtraction amount, but life is too short to spend too much time doing extra calculations. The end result is my spreadsheet says tIRA: 594,242-untaxed and below that says 463,509-after .22tax. Close enough for government work.

[physics911]

Seems like any of the slew of online retirement planners will do 98% of what you are trying to achieve, with a lot less hassle. They take into consideration your account type when running their simulations.
I use Projection Lab for the cash flow visualizations, but there are a lot of others out there.

[tibbitts]

I didn't get much support for suggesting in other threads that net worth needs to be adjusted for future taxes, which seems to be(?) what you're suggesting, but obviously I'm on board with guesstimating taxes and subtracting them.

[yankees60]

Alternatively, someone could instead tax all the tax defered funds and gains and come up with a net after-tax value.

This is what I personally do.

So, for example, as I make Roth conversions which cause me to pay taxes on the converted amount, my measure of “net worth” does not change. That’s because my net worth calculation has already considered the “deferred taxes” embedded in my traditional IRA.

I realize that this is not the majority opinion on this Forum. And that’s just fine.

I am with you in the minority opinion. I believe it strongly and believe it is the only way (net of taxes) to view the value of one's portfolio. $500,000 in a Traditional IRA is not going to provide you with the same net income as is $500,000 in a Roth IRA.

[yankees60]

I didn't get much support for suggesting in other threads that net worth needs to be adjusted for future taxes, which seems to be(?) what you're suggesting, but obviously I'm on board with guesstimating taxes and subtracting them.

You HAVE my 100% support, today and forever!

[Lookingforanswers]

One of the things I've learned from Bogleheads is that it's great to develop an investment policy and tracking strategy that is both simple *and* helps keep you calm during times of stress. To me, taking future taxes into consideration accomplishes both of those goals.

It's not hard to do. And calculating the after-tax value of my holdings keeps me from stressing out about future taxes. Also it keeps me from wondering, "What changes would taxes have on my portfolio allocation, given that there are different tax implications of holding assets in different kinds of accounts?" Finally, when I look at my portfolio withdrawal rate, I look at my estimated spending levels against the after-tax value of my portfolio, since I would owe capital gains taxes if I sell equity holdings to fund withdrawals.

This approach seems super simple to me. I track all my investments on a single spreadsheet that updates current value. Since I know the original cost basis, I know what my capital gains would be at any point in time, and I make one *simple* assumption about future capital gains tax rates. So it's easy to calculate net after-tax value of my holdings. As for investments in my IRA, I make one simple assumption about my future tax rate for RMD's. For my Roth, I assume future taxes will be zero, and that I won't have any early-withdrawal penalties.

All this just adds a couple of columns to a spreadsheet and requires making some simple assumptions about future tax rates. No, there is no way I can perfectly forecast future taxes, but I think I'm reasonably safe in assuming they won't be zero.

[yankees60]

One of the things I've learned from Bogleheads is that it's great to develop an investment policy and tracking strategy that is both simple *and* helps keep you calm during times of stress. To me, taking future taxes into consideration accomplishes both of those goals.

It's not hard to do. And calculating the after-tax value of my holdings keeps me from stressing out about future taxes. Also it keeps me from wondering, "What changes would taxes have on my portfolio allocation, given that there are different tax implications of holding assets in different kinds of accounts?" Finally, when I look at my portfolio withdrawal rate, I look at my estimated spending levels against the after-tax value of my portfolio, since I would owe capital gains taxes if I sell equity holdings to fund withdrawals.

This approach seems super simple to me. I track all my investments on a single spreadsheet that updates current value. Since I know the original cost basis, I know what my capital gains would be at any point in time, and I make one *simple* assumption about future capital gains tax rates. So it's easy to calculate net after-tax value of my holdings. As for investments in my IRA, I make one simple assumption about my future tax rate for RMD's. For my Roth, I assume future taxes will be zero, and that I won't have any early-withdrawal penalties.

All this just adds a couple of columns to a spreadsheet and requires making some simple assumptions about future tax rates. No, there is no way I can perfectly forecast future taxes, but I think I'm reasonably safe in assuming they won't be zero.

I subscribe to all as you describe.

[HooCares]

I don’t worry about it.

Here’s an easy way to know if you’re on track:

gross income - savings = annual expense.

Do you have 25x expenses (minus any pensions)?

If so then you can cover your expenses inclusive of taxes.

Example:

Gross income = $100,000
Savings = $20,000
Expected SS income = $20,000/yr

If you have $60,000 * 25 =$1,500,000 then you can cover all your expenses and taxes. Likely with a nice buffer!

[avalpert1]

So I was thinking that depending on the portfolio composition, how much of it is Roth, basis, tax-deferred, etc, a person has a certain effective amount. A million in Roth is really a million. A million in traditional IRA is probably less. It is reasonable to assume that most people will pay at least 12% on that money. So I started tracking a new metric that I call the gross value of the portfolio. What I do is I assume a conservative tax rate of 12% and all Roth, basis, and cash are inflated by 12%. Then I add all tax-deferred funds and I come up with a value of a portfolio as if it consisted enirely of pre-tax funds. Alternatively, someone could instead tax all the tax defered funds and gains and come up with a net after-tax value. Of course this is highly approximate, but do you think this is a useful measure that basically allows you to compare amounts in different buckets apples to apples while also showing you that you may be closer to your goal than you think.

One can 'tax-adjust' their holdings based on some assumed future tax liability if they want (I personally don't since I see taxes as a wholistic expense I can manage year-to-year instead and am far more comfortable managing it as an expense than guessing at some sort of synthesized 'average' rate for different account types).

But it makes 0 sense at all to inflate the non-tax liable account - rather than give you an accurate view of your current assets or future liability it just gives you a distorted, higher number that has no grounding in reality. Why on earth would you think that is a helpful way to look at it? Your tax liability isn't 12% of what you have in Roth - what you have in Roth has no relationship to the future tax liability.

[yankees60]

Let me make a simple analogy.

In computing your net worth does anyone leave out your mortgage?

In computing your net worth there should be an estimated future tax liability for all your present tax deferred holdings.

Of course, it's not going to be accurate to the penny like a mortgage balance is but it's also a liability.

[international001]

I absolutely found reasonable to approximate the net portfolio value. You can discount a tax of pre-tax IRA. Note that this percentage needs to be the marginal of your effective rate. i.e., you have to calculate the tax for your total pre-tax distributions after other income like SS or bank interest. your distributions may be affected by more than one bracket. I use 20% as a rough aproximation.

What I consider more interesting is AA for different types of accounts. e.g. if you have stocks on roth and bonds on pre-tax, AA should be calculated w/o using the tax discount. But would you still have your stocks on roth?

[avalpert1]

Let me make a simple analogy.

In computing your net worth does anyone leave out your mortgage?

In computing your net worth there should be an estimated future tax liability for all your present tax deferred holdings.

Of course, it's not going to be accurate to the penny like a mortgage balance is but it's also a liability.

From an accounting and tax perspective there is a pretty big difference between a mortgage liability and potential future tax obligations on deferred income.

The mortgage is a realized obligation, you owe it even if it is due in the future. But with deferred income you have no yet incurred a tax obligation, it isn't a deferred liability the income itself hasn't been realized.

From a practical perspective, I think this difference does blow up the analogy. It is entirely plausible that your future tax obligation will be 0, this isn't because of being 'inaccurate to the penny' but because the tax obligation is dependent on when, how, and if you ever realize that income and the tax laws at the time - the mortgage liability isn't contingent on any of that.

[vrr106]

Another one in the minority here. My spreadsheet makes it fairly uncomplicated - I have different sections for taxable and cost basis, 401k and Roth, and it's just a copy-paste to apply tax treatment to each.
Having said that, I also use Pralana to model my retirement and they do a pretty good job of calculating taxes based on the source - so while I like to look at my "net" value, in practice I am not sure I will use it when I retire.

[icrf]

It's just two sides of the same coin. You can either deduct the value of the taxes from your portfolio balance, or you can add the value of the taxes to your spending amount. You're guessing the tax amount either way.

[grok87]

Alternatively, someone could instead tax all the tax defered funds and gains and come up with a net after-tax value.

This is what I personally do.

So, for example, as I make Roth conversions which cause me to pay taxes on the converted amount, my measure of “net worth” does not change. That’s because my net worth calculation has already considered the “deferred taxes” embedded in my traditional IRA.

I realize that this is not the majority opinion on this Forum. And that’s just fine.

I am with you in the minority opinion. I believe it strongly and believe it is the only way (net of taxes) to view the value of one's portfolio. $500,000 in a Traditional IRA is not going to provide you with the same net income as is $500,000 in a Roth IRA.

i am in this camp as well.

[avalpert1]

$500,000 in a Traditional IRA is not going to provide you with the same net income as is $500,000 in a Roth IRA.

It might very well if they are a married couple withdrawing 4% of it and the rest of their taxable income comes from capital gains...

[yankees60]

Let me make a simple analogy.

In computing your net worth does anyone leave out your mortgage?

In computing your net worth there should be an estimated future tax liability for all your present tax deferred holdings.

Of course, it's not going to be accurate to the penny like a mortgage balance is but it's also a liability.

From an accounting and tax perspective there is a pretty big difference between a mortgage liability and potential future tax obligations on deferred income.

The mortgage is a realized obligation, you owe it even if it is due in the future. But with deferred income you have no yet incurred a tax obligation, it isn't a deferred liability the income itself hasn't been realized.

From a practical perspective, I think this difference does blow up the analogy. It is entirely plausible that your future tax obligation will be 0, this isn't because of being 'inaccurate to the penny' but because the tax obligation is dependent on when, how, and if you ever realize that income and the tax laws at the time - the mortgage liability isn't contingent on any of that.

You are correct that there is certainty with the mortgage while one does not really know how the tax deferred gains will eventually be taxed.

However, in accounting you do make journal entries for unrealized gains and losses. This, of course, is different for tax, which would lead to a book / tax difference. However, making a journal entry for the unrealized gain would concurrently lead to increased taxes for that year.

https://accountingmark.com/journal-entr ... 0loss%20on

[avalpert1]

Let me make a simple analogy.

In computing your net worth does anyone leave out your mortgage?

In computing your net worth there should be an estimated future tax liability for all your present tax deferred holdings.

Of course, it's not going to be accurate to the penny like a mortgage balance is but it's also a liability.

From an accounting and tax perspective there is a pretty big difference between a mortgage liability and potential future tax obligations on deferred income.

The mortgage is a realized obligation, you owe it even if it is due in the future. But with deferred income you have no yet incurred a tax obligation, it isn't a deferred liability the income itself hasn't been realized.

From a practical perspective, I think this difference does blow up the analogy. It is entirely plausible that your future tax obligation will be 0, this isn't because of being 'inaccurate to the penny' but because the tax obligation is dependent on when, how, and if you ever realize that income and the tax laws at the time - the mortgage liability isn't contingent on any of that.

You are correct that there is certainty with the mortgage while one does not really know how the tax deferred gains will eventually be taxed.

However, in accounting you do make journal entries for unrealized gains and losses. This, of course, is different for tax, which would lead to a book / tax difference. However, making a journal entry for the unrealized gain would concurrently lead to increased taxes for that year.

https://accountingmark.com/journal-entr ... 0loss%20on

No, the difference is deeper than just being 'uncertain' - the gains (realized or not) are real, not hypothetical, which is why you book the change and the current asset value. The tax obligation doesn't exist at all, it is theoretical and even that is loose (for example in the situation you described in what way does it make sense to book a future tax liability on existing unrealized gains when you know for certain that the liability will be on some unknown future income number, let alone unknown future rate - you have actual gains for the year to book, your tax liability still doesn't exist).

[bltn]

Alternatively, someone could instead tax all the tax defered funds and gains and come up with a net after-tax value.

This is what I personally do.

So, for example, as I make Roth conversions which cause me to pay taxes on the converted amount, my measure of “net worth” does not change. That’s because my net worth calculation has already considered the “deferred taxes” embedded in my traditional IRA.

I realize that this is not the majority opinion on this Forum. And that’s just fine.

I think this is a realistic approach.
While I currently count my entire tax deferred account value in my net worth, I have always known the real value of those accounts was about two thirds of the current total, after income taxes. That was why I never paid much attention to my retirement plans at work when saving for my retirement. I thought of them as an annuity that I could cash out if needed.
On the other hand, when figuring the value of my real estate holdings, I always subtract the taxes on the capital gains as well as transaction costs if sold at market value.
That s not consistent and I may change the way I think about our net worth.