Personal Finance, Retirement 

Calculating Discounted Retirement Asset Value

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A lot of bloggers, and those keeping score at home, put their retirement assets in their net worth considerations but one of my friends, Dimitri, asked if anyone actually discounts it because of time and future taxes. Personally, I do not because it complicates the calculation and takes more work than it does right now (Login, copy and paste number) but the idea does have merit. First, a little about discounting cash flows and then a proposal as to how personal finance bloggers (anyone really) can be a tad more accurate on their current net worth with respect to retirement assets.

With respect to discounting, the idea is that you’re assessing the current value of a future sum of money. A dollar today is worth more than a dollar tomorrow because of the time value of money. Simplistically, it’s worth more is because you can invest the money today (earning interest or profit of one day) and because inflation hasn’t taken a tiny piece away yet. That being said, your retirement assets aren’t available to you (unless you take the 10% penalty) until you are 64.5 59.5 (thanks qw!), and even then only a portion is available to you, so it’s current value is lower than the dollar amount.

Reduce Asset Value by Marginal Tax Rate
This was Dimitri’s original suggestion and is by far the easiest way to be a little more accurate. He suggests that you ignore the fact that you can’t touch the money until retirement and simply decrease its value by your marginal tax rate. At the very least, if you do nothing then you must decrease your pre-tax retirement accounts (IRAs, 401ks) by your marginal tax rate when you compare them with your post-tax retirement accounts (Roth IRAs) so you’re comparing apples to apples.

Why Discounting Really Doesn’t Matter
When you discount your assets, you’re assuming a certain value in the future, hopefully a value greater than your 401(k) balance right now. You reach that value by assuming a rate of return (a popular but overly optimistic one is 10-12%) and then calculating what your asset would be worth when you could take disbursements. Normally, you’d then discount that final asset value by a rate of return, which would still be 10-12%, and so you would arrive at the value you have started with. In reality, it’s not that simple because you would still contribute every year and there’s inflation, but for our purposes your current value is good enough with respect to discounting.

Verdict: Reduce Pre-Tax Retirement Asset Worth by Tax Rate
For a better picture of your pre-tax retirement asset value, I think you should reduce it by your marginal tax rate because at the very least your 401(k) can be compared on even ground with your Roth IRA (for example). While it’s not exactly perfect, it’s good enough.

What do you all think? Good idea? Bad idea? Do you have an alternative that you use? I look forward to reading all and any criticisms, thoughts, rants, anythings on the matter. Thanks!

{ 5 comments, please add your thoughts now! }

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5 Responses to “Calculating Discounted Retirement Asset Value”

  1. qw says:

    retirement money is available at 59.5 not 64.5.

    there is no limit on withdrawals after age 59.5

    If you are willing to take “substantially equal installments” according to IRS life expectancy tables, you can begin withdrawals from an IRA (any 401-k can be converted to such after leaving employment), at any age you want with no penalty. Its a little known fact but it is true. The only caveat is once you start the “substantially equal withdrawals, you have to continue with them on that exact schedule, without deveating from the IRS withdrawal schedule for the rest of your life.

  2. GVS says:

    Slight correction… the “substantially equal withdrawals” must continue for the later of 5 years or until you reach the age of 59 1/2.

  3. qw says:


    Really? I was under the impression that if you chose that path you were stuck with it even passed 59.5. Thats actually a huge improvement. Can I verify that anywhere?

  4. GVS says:

    See IRS Revenue Ruling 2002-62 sections (b) and (c). PDF can be downloaded from [here]

    I suggest anyone considering either starting substantially equal distributions, or modifying current distributions obtain advice a qualified tax advisor as the application of this and previous tax rulings are also subject to numerous “IRS private letter” interpretations which are not readily available to the public on-line.

  5. Mike says:

    I have independently made the decision to discount the value of tax-deferred savings by my current marginal tax rate when calculating my net worth.

    On one hand, if you’re nearing retirement, have little in tax-deferred savings, and spread the withdrawals from those savings over a number of years, you’ll pay little or no income taxes.

    On the other hand, if you have substantial tax-deferred savings at retirement or withdraw your savings rapidly, you can end up in a higher tax bracket especially since you may end up paying tax on social security benefits.

    I’ve chosen my method so that in the short term I’m not unduly influenced on Roth IRA Vs tax-deferred savings influence on tracking net worth short term, and can focus on long-term tax strategy in choosing between these options.

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