As indicated in many of our prior posts, the key metric for managing your spending, assets and risks in retirement is your Funded Status--the present value of your assets divided by the present value of your spending liabilities. The greater this measure, the healthier your financial status, all things being equal. As discussed in our post of June 3, 2025, you may wish to consider increasing your spending once your Funded Status exceeds 120% and you probably should be increasing your spending once your Funded Status reaches about 150% if you wish to avoid leaving an unintended legacy at death.
To determine your Funded Status, it is important to use reasonable assumptions about the future and to value your assets and spending liabilities as accurately as you can. You don’t want to double count or otherwise overvalue your assets, and you don’t want to undervalue your liabilities. On the other hand, there is no compelling reason (other than being conservative) to undervalue your assets or overvalue your liabilities.
Many individuals have complicated financial situations and may own properties, businesses, collectibles and other assets that they would like to use for retirement, but may not be easily valued or artificially “converted” into income. In this post, we will use an example and suggest using the Actuarial Financial Planner (AFP) to help you estimate the present value of properties or other hard-to-value-non-financial assets you may own. Using the AFP to value lifetime payment non-financial assets such as life annuities and Social Security benefits is relatively straight-forward and will not be discussed in this post.
General process to estimate the present value of a property or other non-financial asset.
To determine the value of your asset, you should answer the following questions:
Question 1. When will you sell this asset?
Question 2. How much will you sell it for (net of sales costs and taxes)?
Question 3. What is the annual net income you will receive from the asset (net of taxes, expenses, insurance costs, mortgage payments, etc.) prior to sale?
Questions 4. How risky is this asset as an investment?
Use the “other income” rows to separately calculate the present values of the anticipated asset sale and the annual income before the sale, if any. If necessary, use a non-recurring expense row to calculate the present value of expected annual expenses associated with owning the property. As a check on the reasonableness of your net calculations, the net present value should be in the same ballpark as the current market value of your asset if you know it (i.e., what you think you could sell it for today, net of sales costs and taxes).
Example
Let’s assume Jan and Harry own a rental property. The property has an estimated current valuation of about $300,000 and they have a mortgage on the property on which they expect to pay $25,000 per annum for the next ten years. They receive $20,000 in annual rental income, which they expect to increase annually with inflation and, in addition to their mortgage payments, they expect to incur annual expenses and taxes of about $10,000 per annum, which they also expect to increase with inflation.
They expect:
- to sell the property ten years from now when they have paid off their mortgage.
- the current valuation of the property to increase with assumed inflation of 3% per year, so their sales price ten years from now will be about $403,000, and
- to pay zero income taxes on this sale.
They consider this real estate investment to be 50% risky, but they consider the mortgage they have taken out to purchase it to be 100% essential to them.
The net present value of the expected future income and future sale of this property is determined by entering the following amounts in the AFP and using default assumptions (or other reasonable assumptions). The first two items are entered in available “other asset” rows and the last two items are entered in available “non-recurring expense” rows. Note that the annual expenses could have been netted from annual income but were calculated separately. Also note that the present value of this rental property is approximately the same as their understanding of the net purchase price today (current value of $300,000 less amount to pay off their current mortgage).
Item | Annual Amount | Deferral Period | Payment Period | Annual Rate of Increase | % Upside (Assets) or % Essential (Liabilities) | Present Value (from PV Calcs tab) |
Expected Sale | $403,000 | 10 | 1 | 0% | 50% | $214,689 |
Annual Income | $20,000 | 0 | 10 | 3% | 50% | $172,871 |
Annual Expenses | $10,000 | 0 | 10 | 3% | 50% | $86,436 |
Mortgage payments | $25,000 | 0 | 10 | 0% | 100% | $202,696 |
Net Present Value | $98,428 |
The same process can be used to determine the present value of Jan and Harry’s other rental income properties and/or other hard-to-value assets they may possess.
Caution
If a household has significant amounts of assets that they plan to sell in the future to finance their retirement, it is possible that they may experience cash flow issues prior to the anticipated asset sales. In this event, it may become necessary to sell certain assets prior to the assumed date of sale. This is another good reason to check from time to time that the present value of a hard-to-value asset is approximately equal to the current value of the asset if sold.
Inheritances
From time to time, we get asked whether an anticipated inheritance can be considered as an asset for retirement purposes. Until you actually own and can sell the assets to be inherited, we would caution against including the present value of such assets in your Funded Status calculation.
Summary
If you are struggling to apply the 4% Rule or some other systematic withdrawal approach to your financial situation because you have hard-to-value assets, or your financial advisor is not properly reflecting your hard-to-value assets in their Monte Carlo models, we suggest that you switch to using a better metric for managing your spending that reflects all your retirement assets and spending liabilities—The Funded Status.
