In my most recent post, I updated my investment account balances as of December 31, 2021. In this post, I’m going to take a crack at estimating my total net worth.
As a reminder, my total savings (basically accounts with stocks and bonds in them) reached about $423,000 as of the end of 2021. I am going to be starting with that balance and adding in a couple other assets (net of their liabilities of course). I don’t have a ton of other assets, so this post shouldn’t be too long.
First, I own a small house. I ran a couple of “scenarios” (basically using different assumptions for market values for the property). Under a more aggressive scenario (basically using Zillow’s estimate), I would have about $230,000 in equity.
A slightly less favorable estimate of the value yields an equity estimate of about $142,000. This estimate is basically taking a haircut on the comparable sales and sort of cross-checking that by applying a 10% capitalization rate to estimated (gross) rents for the property.
A third method based on tax assessed value would yield about $190,000 in equity.
I’m going to go with the lowest estimate. I don’t want this figure to be overly impacted by real estate fluctuations over which I have no control, but I also don’t want to totally ignore the impact of real estate on my balance sheet (especially the value of the rent I am avoiding/hedging by owning my home).
In addition to the real estate, I have a little deferred compensation plan via my employer. It is basically a deferred income annuity (or defined benefit plan). I took my “vested” benefits and used an annuity premium estimator on a couple of annuity sales/insurer websites to get a value.
This assumes I don’t accrue any more benefits and that I start drawing on the annuity at 65. I provided my birth date (so they can estimate my longevity). The calculators did not share their assumptions, but two calculators both came up with estimates of ~$143,000.
That’s probably a conservative estimate of the value, as as these are quotes to sell me a fixed annuity (with a built in assumption of profit for the seller of the annuity).
One thing to note is that the current value of these type of annuities goes up when rates go down (because the “discount rate” is related to what the issuer can earn on the premium you pay upfront and from which they pay you back in the future). So, if rates move up bigly, this figure could go down, even if I am accruing more benefits under my plan at work by hanging around longer.
To sum that up, we’ve got $423,000 (stonks and bills) + $142,000 (RE equity) + $143,000 (deferred comp). So, my 12/31/21 guesstimate of my net worth is $708,000.
Basically the entire increase in my estimated total net worth from the end of 2020 is due to the increase in the stocks and bonds balance. Maybe I am being overly conservative. I am pretty sure housing around here has appreciated strongly. I also got the quotes for lump sum annuity purchases more recently, so the increase in interest rates could account for the lack of increase from last year (even though I contributed for another year and accrued more benefits).
I suppose this is good enough for a conservative guess. For purposes of evaluating financial independence, I view the house only as a hedge/reduction of expenses. Sure I could sell and downsize or rent or maybe take out a “reverse mortgage,” but as a margin of safety, I won’t include that in my analysis. On the other hand, the deferred compensation should be accounted for as that will supplement my income in later years. Including an estimate based on how much I would pay to buy an annuity with the exact same benefits in the market today seem reasonable.
For right now, my purpose is merely to gauge whether I am moving in the right direction. I think my conclusion is yes (although more slowly than I would like). Thanks for reading!