When calculating net-worth, how to discount money in an RRSP?
Suppose that I have the following account balances:
Personal Banking Account ,000
TFSA ,000
RRSP ,000
I would like to calculate my net-worth.
The nuance to this problem is that, the money that is in the RRSP will be taxed when it is removed. How should I estimate how much of that money is mine?
Right now I know that my networth is somewhere between k (discounting 50% of RRSP) and 0k (discounting none of the RRSP).
Things to consider:
I am not sure how much I will make in retirement
I am not sure how much my RRSP will grow or how much I will contribute to it
I could just discount the money in my RRSP by an arbitrary number like 20% but if there is a better (but still easy) way to do this, I would be interested.
Crossposted here: www.reddit.com/r/PersonalFinanceCanada/comments/gztjk8/when_calculating_networth_how_to_discount_money/?
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It depends on what you mean by "net worth". If you mean "how much money would I have now if I liquidated everything", then yes you'd take the after-tax (and penalty, if applicable) value of your retirement plans, since that's what you'd get in a liquidation.
But, it would also be a mistake use your current tax rate to discount your retirement savings if you won't need it for a while. If you don't take it all out at once, then you may be in a lower tax bracket when you actually withdraw it. Plus, if you save enough, you might be able to live on the income/growth alone, so you may never touch the amount that's in there now.
So the "right" answer depends on the context, but whenever I think about "net worth" I generally just look at the pre-tax value since I'm many years from retirement and many things tax-wise could change between now and then.
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