Thrifty Thinking: Why Your Balance Sheet May Not Reflect Your Net Worth

A balance sheet shows you at a glance what you own, what you owe, and the difference between the two. If you owe more than you own, your net worth is a negative number, and that’s an early indication of possible financial problems or bankruptcy in your future. Most financial planners will suggest you create a balance sheet at least once a year to track your progress toward financial independence. Personal finance software packages make it easy to create one.

“Your personal balance sheet can tell you a lot, but it may not be telling you everything,” Pamela says. “When it comes to calculating the net worth of retirement accounts, your balance sheet can be extremely misleading – and not in your favor.”

For instance, consider:

1. Hidden Tax Hit: If you have $300,000 in an IRA, 401(k)  or other traditional retirement account (other than a Roth IRA), those accounts would be listed as a $300,000 asset, but you will face significant income tax liability. “Whenever you take money out of your traditional retirement account, you’ll owe income tax on every dollar you remove,” Pamela notes. For a taxpayer in the 25 percent bracket, that amounts to $75,000 you have to pay Uncle Sam, and $225,000 you get to keep.
2. Estate Impacts: “If you die before you’ve withdrawn all the money from your traditional retirement account, what’s left will go to your beneficiaries – and Uncle Sam will look to them to pay the income tax you owe,” she says. “In addition, your family may have to pay estate tax on your retirement money they inherit.”
3. Retirement Account Values Are Subject to Drastic Change: “Your balance sheet shows the estimated worth of your assets if you could sell them today at fair market value. It does not tell you what they would be worth if the market tanks, or even if it soars.”  

We’ve had two market drops of 50% or more since 2000, Pamela notes. “For that reason, take your balance sheet with a BIG grain of salt,” she advises.

Pamela can share a retirement savings strategy that’s not subject to any of these pitfalls. This method — which she calls Bank On Yourself — provides guaranteed, predictable growth every year, even when markets are crashing. It has grown in value every single year for more than 160 years, including during the Great Depression.

p.s. About the Author: Pamela Yellen is a financial investigator and the author of two New York Times best-selling books, including her latest, “THE BANK ON YOURSELF REVOLUTION: Fire Your Banker, Bypass Wall Street, and Take Control of Your Own Financial Future.” Pamela investigated more than 450 financial strategies seeking an alternative to the risk and volatility of stocks and other investments, which led her to a time-tested, predictable method of growing wealth now used by more than 500,000 Americans. Visit: www.bankonyourself.com