Underestimating our Net Worth – and How That Can Hurt Us

Are you Actually an Accredited Investor?

The Day Jim Found $600,000 in Hidden Wealth

I was excited to run into a good friend of mine (let’s call him Jim) last week at one of our ‘Motorhome & Money Tour’ events.

Jim told me that day that he wasn’t an accredited investor yet, but that he aspired to be one because he understands the way that elite status opens new investment opportunities to him.

*You probably know that “accredited” status is achieved through verification of income or net worth. In the case of the latter, you need to show a net worth of at least $1M, not counting your primary residence.

Jim explained to me that he had amassed around $750K in net worth to this point, so he was a quarter million shy of the mark, and he told me he was working hard to reach that goal.

As we talked about the accredited vs. non-accredited divide, I happened to ask him whether or not he had a pension plan. He said he did and that he only had five to six years to go before retirement. It turns out that he’ll receive around $4,000 a month from his pension after retirement.

Seemingly perplexed by my interest in his pension, Jim asked why that mattered.

Future Income is an Asset

Getting to the point of my questions, I then asked him, “Do you have that future incomelisted on the asset side of your balance sheet?”

He gave me a confused look and responded, “No, it’s just income, right?”

I explained that actually his pension is an asset, and that even if he left that job today, he’d still get something once he hit the company’s defined retirement age.

This isn’t well known or much talked about, but it’s a case of an asset being masked as income.

Think of it this way… if you invest in stocks (equities), you would put them on the asset side, right?

Conversely, bonds, and dividends all go on the income side of your statement.

With real estate, the value of your property goes on your asset side… and rents also show as income.

Here’s the kicker…

Just like with real estate, the present value of a pension plan’s expected cash flow goes on your balance sheet as an asset.

I know you’re wondering, “So how is present value calculated?” It’s fairly simple.

If you take Jim’s anticipated life expectancy after retirement (let’s say 20 years in this case) and include a 5% discount rate on the expected cash flow, the net present value of the expected cash flow comes in at over $600,000, which should be sitting in the asset column on his balance sheet.

In short, Jim was already an accredited investor, and he had actually been one for years without realizing it.

What This Means to Jim

I’m not sure how to calculate the likely loss in the value of Jim’s portfolio caused by his not having taken advantage of investment opportunities only available to the accredited, and if I could calculate it, I probably wouldn’t share the figure with Jim for fear of upsetting him.

So let’s choose instead to focus on the positive: Jim discovered during the course of a friendly conversation that he was $600K wealthier than he thought he was.

Prior to that conversation, and despite having conventional financial advisors on his team, he had believed he was shut out of a universe of investing opportunities and that it would take him another 5-10 years to amass that additional $250K to hit the threshold.

This newfound knowledge pushed my friend into that elite status. Imagine how he felt when he discovered that? My guess is that Jim is glad he stopped by for a chat that day.

Are you Underestimating your Net Worth?

So, I ask you:

Do you truly know what you have? Have you tallied your assets properly?

As always, I’m happy to help you discover the truth about your current financial picture, which very well may be rosier than you think…

To success on your own terms,

Many thanks to Colonial Capital Management, NoteSchool and Ryan Parsons for allowing us to reprint this article from “The Buyline.”