2million - My Journey to Financial Freedom

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Monday, February 27, 2006

Taking Assessment of My Portfolio Returns, Part 2: Retirement Accounts

In the 1st part of this series I determined that the total return for my net worth was a measly $2,094. Its a painful pill to swallow and after crunching the numbers, my head immediately filled with logical explanations/excuses as to why this number is so low. Rather then pass them on, lets dig into my net worth and see whats behind this number.

I'll start by taking a look at my retirement accounts:
I currently have a Roth IRA and a 401k Savings Plan.

 

12/31/2004

12/31/2005

Contributions

Return

RoR

Roth

$15,677.86

$20,508.99

$ 3,550.00

$1,281.13

8.17%

401k

$46,683.99

$71,494.39

$17,750.40

$7,060.00

15.12%



Notes:
My Roth IRA is invested in Vanguard Windsor II Investor Shares (
VWFNX).
My 401k return includes the company match.



On a side note: I found on Vanguard's website that the 1 year rate of return for Windsor II Investor Shares was 7.01% as of 12/31/2005. That could indicate, at a minimum, 1.16% of my reported return was from the $3,550 contributions I made over the course of the year.

My retirement accounts had pretty successful returns for 2005. I gained a total of $8,331.13 in these retirement accounts. This is not surprising for me since all of this money is invested in mutual funds which provide me with broad market diversification and more normalized returns.

I'll continue this series by looking at my 2005 returns for my cash accounts, investment accounts, ESPP & stock options, and rental property.

4 Comments:

  • 2million,

    Good job on your blog. I was wondering - would you ever want to take into account that your 401(k) value is actually much lower due to taxes? You'll eventually take your money out taxed as ordinary income, so to add all your 401(k) money to your net worth without taking into account taxes is kind of agressive.

    By Anonymous Wes, at 4:53 AM  

  • Wes,

    Very good question! I have thought about it, but I haven't done anything to account for *taxes* because it part of a larger tax issue for me.

    There are multiple places where I have a value associated with the asset(s) but it is ineffect pre-tax. For example my rental house. I will be depricating the building, etc so technically if I sell it I would owe taxes on any reclaimed deprication.

    If anyone has some suggestions, please let me know. Anyone know how businesses account for this in their financial statements? This is definitely on my todo list. So far the best thing I can think to do is ignore it ;-).

    By Blogger 2million, at 9:50 AM  

  • I'm at a 25% Federal tax rate and 9.3% CA tax rate, so I multiply my 401(k) value by (1-.25-.093-.1 = 55.7%). The 10% is from early withdrawal, since if I need the money now I'll have to take the 10% early withdrawal fee.

    By Anonymous Wes, at 3:58 AM  

  • 2M,
    If I remember correctly, business subtract depreciation claimed from the value of the asset. I haven't seem them reserve for reclaimed depreciation on the sale of a real estate asset unless they had already planned to sell it.
    Since you, as a person, operate on a cash basis (from tax perspective), you might as well value it outside of the depreciation - after all you don't know if the market could flip upside down once the baby boomers all retire and although unlikely, you might have the chance to sell it for a loss (very unlikely), but enough of a point that it's probably not worth messing with.

    Also, you if you lived in the property for two out of the last five years, you get to exclude $250k in capital gains - that might render the depreciation recapture moot.

    Finally, many landlords try to arrange a starker exchange, where the proceeds of one asset sale are rolled directly into a new asset within 60 days of the sale of the first asset. This delays payment of taxes on capital gains.

    As to the other gentleman's point about selling his property under duress, is he really that likely to do so, or perhaps to open a HELOC to free up some cash.
    I imagine that's a much more likely solution -- otherwise Wes might consider a further discount on the value of the property to account for reduced price to sell quickly under duress.

    By Blogger makingourway, at 2:37 AM  

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