What is your net worth? For many, they've heard the term net worth countless times but if you ask them to define it, they may have some trouble. So lets start with that: What is net worth?
Net worth is the amount by which assets exceed liabilities. This is roughly calculated by adding up all your cash and other assets and subtracting your debts.
What are Assets:
Current market value of your investment accounts
Current market value of your retirement savings in all retirement accounts. (Include even those accounts that would charge a penalty for early withdrawal like 401ks and IRAs.)
Current market value of your home and/or rental property.
Current market value of your vehicles.
Cash value of your checking accounts and savings accounts.
Items of significant value like artwork, antiques, or jewelry.
And your Liabilities:
Mortgages on your primary residence and rental properties
Credit card debt
Liens or judgments against you
So if you have $200,000 invested, $50,000 in the bank, and a home worth $250,000 your assets total $500,000. And if you have a mortgage on that home of $150,000 and auto and student loans totaling another $100,000, your liabilities total $250,000.
Therefore: Assets - Liabilities = Net Worth
In the above example your net worth would be $250,000.
The US Census collects all types of this data (2013 is the latest). If you want to check it out, click HERE. This will bring up and excel spreadsheet which breaks down the data into all sorts of cohorts. Here is the summary of the information we are discussing today:
(US Census; 2013)
These are median values- not mean. That means that there are just as many people with a value above $6,900 as below. If we used a mean average, there would be a large group at the low end and a few really big earners at the high end which would skew the value.
Anyway, as you can see above I have included the main Net Worth number, but also the column which excludes the equity value of the primary householdresidence. Why did I do this? Well, for one, you probably won't sell your home in retirement, but continue to live there until death. Or if you did, you would then take that equity and buy another (perhaps smaller 'downsized' home).
That home equity is a huge portion of a household's net worth. The below chart details the percentage that home equity makes up in each age cohort:
Whether this is good or bad is hard to say. For one, it seems like the best way to build wealth is through real estate. It is an easy way for people, especially those who have a hard time saving, to actually go and save for retirement. However, your home is the most illiquid asset you have. It takes time and expense to sell it. And then where do you live after it's sold? You then have to either buy another home or rent, both producing cash outlays. Yes, you can take equity loans or even a reverse mortgage in retirement to access that cash. But I would only do that as an emergency when all other avenues are gone.
What Should It Be?
So what can we learn from this? First let's examine what the general rule of thumb is. Basically, in your 30s, your net worth should be at least HALF your current salary. By your 40s, you net worth should be at least TWICE your salary. And so on, detailed below:
Let's start by examining a few of the age cohorts:
30s Age Group
Looking at the net worth chart, the under 35 is a large time-span to be one grouping. However, when you think about it, most people don't earn anything until their mid teens at the earliest- and even that's usually minimum wage on a part-time basis. Salaries start to ramp up in the late 20s- this is probably why they lumped the under 35 grouping all together.
Moving to the net worth goal chart, it states those in their 30s should have half their salary as their net worth. This is the most difficult goal as many people in their 30s are still in the early stages of their careers, still have college debt, and lead higher expense lives.
So the goal here is to hit that milestone as early into your 30s as possible. So start stashing away in your 20s! If you accomplish this goal by age 30, you then have 10 years to accumulate for the 40s milestone (twice your salary). This way you're ahead of the game!
40s Age Group
This is the largest jump up. By this time most have purchased a home and have built up some decent equity in it, as well as have a decade or two of retirement account contributions and growth under their belt.
60s Age Group
Skipping ahead to the 60s, you need to have 6 times your annual salary (assuming you're still working). This is doable as you probably are close to paying off your mortgage (or have done so), have 30+ years of retirement account contributions and growth packed away, and usually the kids are gone and off on their own.
Quick Look at the Rest of the Data
Lastly, looking at the full detail of the US Census data spreadsheet, we can see that if you're white, native-born, aged 70-74, have no children under age 18, are married, have a graduate degree, have healthcare coverage with no disabilities, live in the northeast, and own your own home... you will be in the highest grouping of net worth.
Conversely, if you rent, live in the south, are of a minority group, are aged 34 or less, have no high school diploma, and are single... you will be in the lowest grouping for net worth.
Remember, net worth is far different and more important than income. People can make a million dollars a year and still go bankrupt. Setting a goal and planning it carefully is what increases net worth.
Also, don't forget inflation when calculating how much you'll need in retirement. Just because you have a net worth that is in line with the chart, doesn't mean you are ready. Depending on where you live, and your lifestyle, those needs in retirement will vary. A common rule of thumb is to replace 85 percent of your working income in retirement. If your retirement dreams are grand and include exotic travel, then you might need more. Alternately, if you’re seeking a quiet retirement in an affordable community, then you’ll need less. We wrote an article on calculating retirement income amounts.
And remember, we saw that owning your own home is a very big factor in final net worth. We tend to reach “peak net worth” in our 60's, because that is when the average retirement age is. At that point we start drawing down on our assets. Social Security starts as well, which isn't factored into your net worth as it is accrued but unpaid. So start paying in equity instead of tossing money away in rent.
And finally, here are a few handy calculators to find your net worth: