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What is your net worth? No, I’m not asking a personal financial question.
Rather, the question is what is included in your net worth? The standard definition of net worth is a financial metric that represents the total value of a person’s assets minus their total liabilities. In simpler terms, it’s what you own minus what you owe.
I don’t think it’s that simple. I view it as two calculations, estate net worth and practical net worth. Practical net worth being those assets easily liquid and available to spend if necessary or desired. Estate net worth is the standard definition.
Connie’s jewelry collected around the world over 56 years may be an asset, but I’m not telling her that. Doing so would make me a liability.
A person’s home is an asset, but not practical to spend as you still need a place to live. Same with a vehicle assuming you need transportation to make a living or take your spouse to the jewelry store. A vacation or any second home is both a practical and estate asset.
Is your IRA or 401k part of net worth? Most people would say so and legally they are, but I don’t think so.
Is my pension an asset toward net worth? Nope, not any more than a person’s salary. It has no lump sum value to me and evaporates when I do. If an IRA or 401k is your resource that generates retirement income, I would, for practical purposes, exclude them from net worth just like my pension. If you spent them at once you have no income. On the other hand, I don’t use my IRA as income so perhaps it is an asset.
I count paid up life insurance as part of net worth and so it is for estate purposes, but questionable for practical purposes because the value is not available until … you know.
I calculate our net worth on Fidelity, but it does not include any personal assets, just all investments plus our homes and my life insurance. Frankly. I have no idea how to value the stuff we own, nor will I try. I have a 1929 catchers mitt and a hundred year old diamond ring (with a crack) if anyone wants to give it a go.
Net worth is deemed important for these reasons. I suspect not all this applies to retirees and I question other purposes if you think about the estate definition.
According to Empower the average and median net worth at age 50 is $1,489,427 and $288,753.
At age 60 $1,684,180 and $442,234.
While 80 year olds have $1,515,041 and $342,212.
Given what is included in net worth, those medians are not overly impressive, especially for individuals who own a home. Who knows how accurate those numbers are?
Americans believe it now takes an average net worth of $2.5 million to be counted as rich, a 14% increase from last year’s $2.2 million, according to a new survey from Charles Schwab.
To me, for most people being rich is more a factor of income and liquid assets, not net worth of which perhaps a third or more could be a home.
The Empower numbers do tell me something though – how fortunate we are and that even with my seat-of- the pants, lackadaisical approach to finances, sans budgets and spreadsheets, one can be financially successful – with time on your side.
Money is fungible. But this appears to be contrary to Dick’s approach of every spending goal having its own account.
Following that idea is how people get into trouble- using money intended for one purpose for another. Would take money from your 401K or IRA to buy a car?
I know someone who retired and immediately took most of his 401k – $200,000 and bought a large RV and after a year or so found out he couldn’t afford to run it and sold it at a loss. That is why I say qualified plans are not a part of a persons practical net worth, it’s not practical to see it as fungible.
Mr. Quinn, one of the challenges with thinking as you suggest is that one size does not fit all or even most retired folks. Your example of a fellow with a $200,000 401k wouldn’t be meaningful to someone with a $2M 401k, plus a taxable account and a Roth to boot. Perhaps someone whose finances are only marginally ample might find it helpful to segregate so that their funds endure through their retirement. Most HD readers are quite competent in handling money and don’t need this kind of crutch.