Valuing Your Hard-to-Value Retirement Assets

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). 

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.