Planning Your Retirement: Calculating Your Net Worth

Calculating your net worth today is important for your financial future because it can help you develop a deeper understanding of your current financial situation. Your net worth can also serve as a possible starting point for retirement planning.

Your net worth can directly affect retirement planning as it can help you get a sense of how much money you’ve saved for retirement and therefore the cash flows you can expect to generate over that time period. It can influence tax planning, such as your ability to pay taxes on future withdrawals from individual retirement accounts (IRAs) or when realizing gains in taxable accounts. Knowing your net worth can also help you determine your investment time horizon and your portfolio’s optimal asset allocation—the mix of stocks, bonds and other security types. For example, will you need your assets to grow more to offset the effects of purchasing power lost to inflation? What if you live longer than expected due to ongoing medical advancements? These are important questions to ask when planning for retirement, and calculating your net worth can be a crucial step in that process.

What You Own and What You Owe

Fortunately, calculating your net worth is relatively simple. Net worth is essentially what you own minus what you owe (Net Worth = Assets – Liabilities).

Before doing anything, you should gather all your major financial documents—or have a good idea of the details of your accounts. Then start by adding up the value of all of your assets. That includes, but isn’t limited to, the following asset categories:

Liquid assets. The available information on these items is typically up to date, as they are made up of assets that are valued periodically. Your liquid assets might include:

Non-liquid assets. The value of these assets is generally harder to gauge, and selling them might take a while. However, you may be able to estimate their value by comparing them to recent sales of similar assets. Non-liquid assets commonly include:

  • Real estate
  • Private investments
  • Collectibles

Once you have added up the value of your assets, subtract the amount of your liabilities. These may include:

  • Mortgages
  • Student loans
  • Car loans
  • Securities margin loans
  • Lines of credit
  • Unpaid credit card balances
  • Other debt (e.g., unpaid taxes, alimony, child support, personal loans etc.)

Your net worth can be calculated “as is” or including 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. However, no one knows your tax situation better than you (and likely your accountant or tax advisor). So, when calculating your net worth for retirement, it may be beneficial to also consider the taxes you might have to pay if you were to include liquidate assets.*

Plan and Review, but Don’t Obsess

Dwelling on your net worth might seem unnerving because that number isn’t static.  It is normal for the total value to fluctuate along with various short-term changes to asset and liability values. But it isn’t necessary to worry about your net worth on a day-to-day, month-to-month or even a year-to-year basis as long as you have a sound long-term investment strategy and financial plan in place.

When you are finished calculating your net worth, you should ask yourself some questions to help define the goals for your assets:

  • What are your long-term financial goals? Do you want to maximize your portfolio’s long-term value, or would you prefer to simply maintain your current purchasing power?
  • What about cash flow? When and how much money do you plan to withdraw during retirement?
  • What is your investment time horizon? Are your investments ultimately for you, or do you plan to leave something to your loved ones such as a spouse or children?

You want to enjoy your retirement years, but you don’t want to outlive your money. Varying investment time horizons can have a dramatic effect on your optimal asset allocation.

Fisher Investments’ Your Net Worth guide can help get you started and provide useful tips for efficiently calculating your net worth. You can also find additional tips on how to use this information when planning for retirement, so request your copy of our guide today.

*The contents of this article should not be construed as tax advice. Please contact your tax professional.