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A FEW WEEKS AGO, my net worth hit the $1 million mark. It was a milestone I’d been looking forward to for years.
Almost a decade ago, I performed my first net worth calculation. Back then, I was recently divorced and living on my own for the first time in my life. My only assets were three retirement accounts and a seven-year-old car, plus half the proceeds from the sale of a house my ex and I had owned.
I calculated my net worth because I wanted a starting point for evaluating my financial health. My bottom line back then was $230,544. I knew conventional financial wisdom preached that folks should have at least $1 million saved before they retire. Having a net worth of less than one-quarter of that amount—at age 45—served as a reality check. I made the decision to dedicate the next several years to shoring up my finances.
That involved setting goals—including the goal of eventually hitting a net worth of $1 million. I had no idea if or when I’d ever achieve that level of financial security. How, in less than a decade, was I able to get there?
Saving voraciously. Once I’d found my financial feet following the divorce, I was able to consistently save and invest a huge percentage of my paycheck over a four-year stretch. Starting in 2014, I began steadily increasing the amount of money I contributed to my retirement accounts. Initially, I set aside $500 each month. But within a year, I’d increased my contributions to $2,000 a month, which meant I was saving some 40% of my pretax income. I continued to contribute between $1,000 and $2,000 every month through 2018.
Winning at real estate. In late 2018, I purchased a modest-sized home in a popular Portland, Oregon, neighborhood for $375,000. The money I had been contributing to my retirement accounts was now funneled into making mortgage payments. In March 2022, I sold the home for an astonishing $600,000, thanks to the booming real-estate market of the past two years.
Getting married. In 2018, I remarried. Since my husband and I each entered into the marriage with our own set of assets, we now hold a mixture of joint and individual accounts. For the purposes of my own net worth, I only include those assets we own jointly. This includes a home in Arizona we bought together in 2019, as well as the two vehicles we own.
Where do I stand now? My retirement account balance peaked in January at $477,000, but it’s since fallen back to $436,000.
In March, I deposited a $278,000 check. That check was the proceeds from the Portland home’s sale, after deducting closing costs and the sum owed on the mortgage. Meanwhile, the value of our Arizona home has increased substantially since we purchased it in 2019. We now have approximately $200,000 in home equity.
The last component of my net worth equation is my state pension. Although my pension makes up a relatively small percent of my overall net worth—about 5%—I hadn’t previously included it in my net worth calculation. Until I turned 55, the only value it held would have been as a survivor’s benefit for my beneficiary if I’d passed away. Now that I’ve reached the minimum eligibility age for drawing benefits, I feel comfortable including it as part of my overall financial worth.
All that, plus a few other assets such as our two cars, gets me to seven figures. But arguably, my net worth is even larger. How come? I haven’t included the value of my future Social Security benefit. To buy a government-guaranteed, inflation-adjusted stream of income like that would likely cost a hefty six-figure sum.
Kristine Hayes retires this month from her job as departmental manager at a small, liberal arts college. She enjoys competitive pistol shooting and hanging out with her husband and their dogs. Check out Kristine’s earlier articles.
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Excellent, Kristine! Congratulations!
Good job, Kristine!
Kristine chose to target net worth for her goal. Along the way, she surfaces several challenges with that measurement, including 1) do you include future income streams, and if so, how? and 2) if you’re married or in a relationship, do you count your net worth jointly or individually.
Ultimately I guess it was her measure and she gets to decide what she wants to include. I also make my own decisions about what to include.
My own net worth spreadsheet includes cash, investments, possessions (including the house I live in,) and potential future streams of income in four different sections. Generally, though, I only include current assets when I calculate my current “net worth.” Since I’ve been married once, for 42 years and counting, it also makes sense to me to calculate OUR net worth, since we treat it all as a shared stewardship. Occasionally I think about what would happen if we divorced or one of us died. It’s pretty obvious divorce would hurt in so many ways, including our financial security.
Inflation over the last decade has been tame–15.87% total on one calculator. On the other hand, the total return of the S&P 500 has been rich. Just under 200% adjusted for inflation, 270% not adjusted for inflation. If the original investment of $225k was invested in the index (and there were no fees!) that would be worth $607k today. But then $1000 a month for ten years is itself $120k additional plus perhaps another $100k for its investment return.
Of course, we never do quite as well as an index!
“Of course, we never do quite as well as an index!” Now that Fidelity offers zero-cost index funds, yes you can.
Kristine, congrats on reaching your milestone. I’ve always emphasized to our kids that a “low domestic overhead” is a key ingredient in saving for the future, and your story is a great illustration of that. Now, if you could just have a word with our kids….
When I prepare a net worth statement I only use assets/liabilities as defined by B Carr below. I find it a little more conservative but that’s just personal preference. I do have a section for life insurance separate and apart from the net worth statement but that’s more designed to let my wife and daughter know what’s out there and where in the event I die. As to Richard’s comment, I would only base the “4%” on retirement and other investment accounts.
Congratulations on achieving your milestone. While reasonable folks might disagree on whether which terms best apply to describing your financial progress, the bigger picture is that you’ve executed a conservative plan and radically improved your financial posture during the last decade. It’s yet another example of the value of following basic financial principles to radically improve one’s financial situation. Thanks for sharing.
Thanks for your comments. I’m a believer that one can achieve a high degree of financial security on a moderate income as long as they don’t live above their means. The few years I spent living on a fraction of my income allowed me to quickly accumulate a relatively large sum of money. That money will be sitting in my retirement account, hopefully, for many years before I need to rely on it for income.
Net worth calculation is a balance sheet calculation. Assets & Liabilities. Assets are things that you could pass along in your estate after you die. Social Security for example can’t be an asset since it dies when you die. SS is an income stream. A pension that dies with you cannot likewise be an asset – it is an income stream.
All IMHO, of course.
I disagree. An asset is the right to receive benefits, usually in the form of cash flow, from something. The fact that your right may terminate on your death does not stop it from being an asset to you even though you can’t pass it to your heirs. Hence, the present value of annuities and pensions should be included in your net worth.
Your article raises a couple of interesting questions.
Is a pension part of net worth? I guess if there is a lump sum payment option is could be, but if it’s an annuity payment I would not count it as part of net worth similarly to not counting a salary. That’s my opinion, I’d like to hear others.
The second question which has popped up in other blogs too is whether investments or net worth is the base for determining adequate retirement income generating assets. I always assumed, say the 4% guidance, was based on taking 4% of retirement funds and/or other investment accounts-that magic $1 million, but not net worth. Am I wrong?
My understanding of the 4% rule is that it is an estimate of the amount you can withdraw from your investment accounts without running out of money in 30 years (I believe Bengen assumed a 50/50 equity bond allocation). Because it doesn’t take into account the amount of money in one’s investment accounts, the 4% rule says nothing about the adequacy of one’s investment assets.
Your comment highlights the fact that there are several different ways of conceptualizing overall financial wealth. While pension, SS, and annuity income are typically not considered part of our net wealth, they are obviously vitally important components of our overall financial well-being. They are also interrelated with our other assets through their effects on the amount of our investments that we need to spend each year.
In thinking about this one can consider the impact of spending $1 million to purchase a large immediate fixed annuity on our financial status. While this would reduce our net worth by $1 million that obviously wouldn’t the case for our financial well-being.
Good point. In one case we are talking about income streams which would not count as net worth and converting an investment into an annuity may lower net worth, but may increase overall financial well-being.
The 4% rule or whatever we want to call it gives you an idea of the – not guaranteed – income stream you can hopefully create from a defined pool of assets. So what matters is really knowing that in theory $1,000,000 can safely generate $40,000 in income – likely assuming starting to withdraw not before age 65 to use 30 years. If the income need is $80k of course the $1 million becomes $2 million, etc.
I think a pension is definitely part of net worth. I think it differs from salary in the fact that one must work to get the salary, so a death obviously cuts off that income stream. Not so with a pension with survivor benefits.
This article has an approach to quantify its worth which has an interesting approach- What is a Federal Government Pension Worth? – Mustard Seed Money
I guess you could look at it that way, but I don’t think that makes it a part of net worth. If you have a house the value to your estate is not dependent on having survivor benefits. If a pension has a present value of say $2 million and upon death the remaining balance is paid to the estate it would be part of net worth, but that never happens. I wouldn’t count SS as part of net worth either, but it’s the same idea as a pension.