Planning Your Retirement: Calculating Your Net Worth

Calculating your net worth today is important for your financial future. Think of your net worth as a high-level snapshot of your current financial health. You can use your current net worth to assess your progress toward your future financial goals.

Knowing your net worth can also help you develop a deeper understanding of your current financial situation and give you insight into the areas of your life you might need to adjust, whether it be staying the course for retirement planning, managing debt or planning to pay for other major life events.

Understanding your net worth can help you identify and place a value on your assets and debts. It can also help you estimate how much money you’ve saved for retirement and the cash flows you can expect to generate over time on that money.

The first step is understanding how to calculate your net worth.

Assets and Liabilities: What You Own Versus What You Owe

Fortunately, calculating your net worth is relatively simple. Net worth is essentially what you own (total assets) minus what you owe (liabilities and other debt).

Net Worth = Total Assets – Liabilities

Before you calculate anything, you should gather your major financial documents or have a good idea of the details of your accounts, including savings accounts, credit card balances, loans, etc. Then add up the value of your assets. Be sure to include the following asset categories as part of your review:

Liquid assets. These assets are valued frequently and can be sold or converted into cash relatively easily. Your liquid assets might include

  • Cash
  • Securities in taxable investment accounts (e.g., brokerage accounts and trust accounts)
  • Bank certificates of deposit (CDs)
  • Individual retirement accounts (IRAs) and other retirement plan assets
  • Cryptocurrencies
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Non-liquid assets. These assets are generally harder to value. Selling them might take a while. However, you may be able to estimate their market value by comparing them to recent sales of similar assets. Non-liquid assets commonly include

  • Real estate
  • Personal items such as jewelry or vehicles
  • Collectibles
  • Precious metals
  • Business ownership interests

Liabilities. These are your debts and other financial commitments. Subtract these from the value of your assets. Liabilities may include

  • Mortgages
  • Student loans
  • Car loans
  • Margin loans on securities accounts
  • Lines of credit
  • Credit card debt
  • Other debt (e.g., unpaid taxes, alimony, child support, personal loans, etc.)

Your net worth can be calculated “as is” or can include the taxes you may have to pay in the future when you take money out of tax-deferred accounts or sell appreciated assets. Because tax rates vary among individuals, account types and investment vehicles, we assume an “as is” calculation without including taxes. For example, if your assets add up to $1.5 million and your liabilities total $200K, then your net worth would be $1.3 million ($1.5 million – $200K = $1.3 million).

Your Net Worth Over the Long Term

You shouldn’t need to regularly calculate your net worth as long as you have a sound long-term investment strategy and a financial plan in place. However, changes in life happen and your financial situation evolves over time. As certain life events affect your financial picture, it’s a good idea to recalculate your net worth to see how far along you’ve come in reaching your goals, or if any changes are required. Examples might include paying off debt, changing residence, getting married, having children, etc.

After calculating your net worth, you can ask yourself some questions to help determine if any other changes are needed:

  • Have my long-term financial goals changed? Does my current net worth put me closer to or further away from my goals?
  • Have my anticipated cash flow needs changed? When and how much money do I need?
  • Does my current financial situation foreshadow a change to my investment time horizon? If my goals or needs have changed, does my current investment time horizon give me a realistic period to achieve my goals?

Strategic planning and managing your personal finances can mean the difference between a comfortable retirement and having to worry in your later years about how to maintain your lifestyle.

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