If you’re thinking about saving for retirement, calculating your net worth can be a useful tool. It can help you evaluate your current financial picture, set goals and budget for retirement. While looking at finances may be necessary as you plan, keeping a holistic viewpoint which includes health and relationships could lead to a sense of overall well-being in the next stage.
To estimate the net worth you’ll need to retire, consider the following factors:
— How to calculate your net worth.
— What is considered wealthy?
— How to determine your retirement needs.
— Ways to monitor your net worth.
— How to spend your net worth in retirement.
[What Is the Average American Net Worth by Age?]
How to Calculate Your Net Worth
Your net worth helps you understand the value of your assets. “It shows and tells you what you owe and what you own and how much money you really have,” says Pam Krueger, founder and CEO of Wealthramp in Tiburon, California.
Start by adding together all your assets, which might include cash accounts, stocks, bonds, retirement accounts and the value of your home. Then find the amount you owe on your mortgage, auto loans, credit cards, student loan balances and any other loans. Subtract the total debt from the total assets to find your net worth.
There are several ways to go through the calculation process. You can write it all down with pen and paper or record it in a spreadsheet. There are also apps and online calculators to help you find and track your net worth.
What Is Considered Wealthy?
Americans consider a net worth of $2.2 million to be wealthy, according to the 2023 Modern Wealth Survey by Charles Schwab, which surveyed 1,000 people ages 21 to 75 throughout the country. Interestingly, among the 48% of survey respondents who stated they already feel wealthy, their average net worth was $560,000.
“There is no one-size-fits-all number for how much money you need to have at retirement,” says Anthony Pellegrino, a fiduciary advisor and founder of Goldstone Financial Group in Oakbrook Terrace, Illinois.
Moreover, nonfinancial assets such as well-being and experiences may be more important when defining wealth than the value of possessions, according to the survey. In fact, 62% of Americans reported that being able to enjoy healthy relationships with their loved ones was a more accurate portrayal of wealth than having large amounts of money. Among respondents, 7 in 10 explained that wealth is more about not having financial stress than having more money.
[See: Money Moves You Will Be Thankful For.]
How to Determine Your Retirement Needs
If you want to set a goal for net worth at retirement, the amount should be in line with your lifestyle and budget. “Figure out what your living expenses are at retirement and don’t forget estimated taxes,” says Zachary A. Abrams, manager of wealth management at Capital Advisors in Shaker Heights, Ohio. Consider any home or rent payments, transportation costs, utilities, insurance, travel, and entertainment and other activity costs.
The exercise may reveal that your expenses will be lower during nonworking years. For instance, perhaps you currently earn $100,000 annually and estimate that you’ll need $80,000 during each year of retirement. But if you plan to travel and dine out more often or move to a location with a higher cost of living, the amount you need to live on in retirement could be higher.
“After you have an idea of how much income you will need in retirement, the next thing you should do is take an inventory of all your future anticipated income,” Abrams says. This could include Social Security benefits, income from a pension or annuity, or anticipated part-time work earnings. Subtract these inflows of money from the expenses. “Then you’ll be able to estimate how much you will need to have saved in retirement in order to make up the difference,” Abrams says.
One rule of thumb is to estimate your expenses, subtract the sources of income, and then multiply the number by 25. “This will be a good ballpark estimate for how much you should have saved and invested in a well-diversified portfolio in order to meet your income needs in retirement,” Abrams says.
Ways to Monitor Your Net Worth
The amount accumulated by Americans tends to increase over time, with those between the ages 65 and 74 having the highest net worth, according to research by career website Zippia. In that age group, the average net worth is nearly $1.22 million and the median net worth is $266,400. Those who are younger than 35 years old have an average net worth of $76,300 and a median net worth of $13,900.
After you calculate your current net worth, you might decide to update the calculation periodically, such as once a year, to track your financial progress. If you pay off debt, increase your salary or add to your savings, the figure may go up. As your net worth increases, you might be motivated to set further goals. For instance, if your net worth is $100,000 the first time you calculate it, you might look for ways to boost it to $125,000 and then $150,000.
[READ: Steps to a Higher Net Worth.]
How to Spend Your Net Worth in Retirement
Once you achieve the net worth you need to retire, it’s still wise to keep a close eye on your budget. Suppose your net worth is $3 million and you spend $500,000 per year. In this scenario, you will exhaust your funds quickly. “If you retire with a net worth of $1 million, have zero debt and only require $60,000 a year to live, you could be more financially secure than the person with three times your net worth,” Pellegrino says.
There could also be market fluctuations, periods of high inflation and economic downturns. You may find that you need to lower your living expenses by moving to a smaller home or eating out less. Sticking to a budget can help you avoid debt during retirement that could result from depleting your net worth.
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What Net Worth Do You Need to Retire? originally appeared on usnews.com
