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What Is It Really Wortth?

A recurring problem with financial planning involves future events that a client thinks will happen and which, if they do, will positively impact the plan and the client’s situation. Examples include events such as prospective inheritances, the sale of a business, receipt of gifts and my personal favorite, expected lottery winnings. Don’t laugh, at least one person attempted to address their planning needs with that type of cash flow.

The problem with these items is twofold. The first is whether the event will happen at all and that of course requires, among other things, that the recipient live long enough to receive that item.  But our focus here is on the second, which involves the valuation of that item. What is the number that we want to put in our plan…what is it worth?

Sometimes it is fairly easy to put a value on an item. We receive statements from Social Security saying how much we can expect to receive at various ages, depending on when we start taking the benefit and whether we can add to it by continuing to work. Unfortunately, not many items are as predictable and it is very uncommon for people to specify to their heirs the exact dollar amount those heirs might receive at different times.

Whatever you do, be careful not to place too high a value on an expectation. One can always enjoy the problem of dealing with the receipt of more than one expected but the flip side is painful. The value of a business or other asset today might not have any connection with its value at the time you want to turn it into money in your hands. Consider the highly successful business of a buggy whip manufacturer in 1890 versus its value in 1920 with the motorcar firmly established. Things change and that must be addressed in any valuation.

Another often overlooked item is what I like to term friction. This represents the costs of getting the money from this event into your plan. It is not just taxes but things like legal and accountant fees, commissions, and other expenses. Think here of a house closing and all those little additions that add up to so much at the end. One never seems to ever get the full amount they expected.  

Bottom line, what something is really worth can be very hard to predict and very easy to overstate. Take your best guess and then cut that in half and you might not have too many bad surprises.

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