Proper financial planning involves more than living within your means, setting up an emergency fund, and saving for the future. These are great first steps toward financial freedom and security, but as you build your portfolio you will find additional considerations that need to be made.

One area you will want to give significant thought to is your retirement. There are some good steps you can take towards providing a comfortable retirement for you and your family. For example, maxing out your retirement contributions and investing in portfolios chosen with your retirement timeline in mind can be crucial to affording the lifestyle you envision.

One of the most important ways to chart your progress is to track your net worth. In this article, we will discuss what affects your net worth, how it is calculated, and its application in retirement planning.

What is Net Worth?

Your net worth includes more than just the income and assets you have; it also factors in your liabilities. In short, your net worth compares your assets to your liabilities. If you have more assets than liabilities, then you have a positive net worth. 

Conversely, let’s say you have a well-paying job, a stable business, and a good portfolio. At first glance, you may think you have a good or comfortable net worth. However, if you have little equity in your home, hefty mortgage payments and modest savings, your net worth may be negative.

You can start to see how this could negatively impact your retirement. Once you retire, you will likely rely on income from investments, pensions and social security to meet your normal living expenses. If you are still making mortgage payments on your home, your income in retirement may not cover fixed expenses and additional costs for travel and leisure that people often look forward to in their golden years. 

How to Calculate Net Worth

Calculating your net worth involves a thorough understanding of your finances. The first step is to carefully assemble information on all your assets and liabilities.

Your assets include bank account balances, investments, retirement funds, real estate, and other high-value items like vehicles. Your liabilities take into consideration your mortgage, credit card debt, and any other kinds of loans or debt.

As we mentioned earlier, calculating your net worth involves subtracting the total of your liabilities from your assets.  

Consider This Example

Let’s assume you are in your late 40s and have the following assets and liabilities:

Assets

Cash Bank Balances: $30,000

Investments: $200,000

Retirement Funds: $70,000

Real Estate: $200,000

Vehicles: $20,000

Total: $520,000

Liabilities

Mortgage: $300,000

Credit Card Debt: $10,000

Personal Loan: $60,000

Total: $370,000

With this information we can calculate your net worth using the following equation:

Assets – Liabilities = Net Worth

$520,000 – $370,000 = $150,000

Based on the example, you can see that at this point in time, you would have a positive net worth. 

Planning For Your Retirement

Following your net worth is extremely important as you prepare for retirement. But just as vital as forecasting your net worth on the first day of your retirement is knowing the kind of lifestyle you would like to be leading once you no longer have to work.

People often spend more in their early retirement years than when they were working. Now there is time for travel, hobbies, and experiences they’ve wanted to try. These are additional expenses on top of the costs of daily living.  

Knowing your estimated net worth in retirement will help you know what you will be able to cross off your bucket list. Maybe a part-time consulting gig will put you in a better place financially for those splurges. Without a firm grasp of what your net worth will be at retirement, it will be hard to make those dreams for your golden years to come true. 

If your net worth is on track, you can relax a little, but don’t take your eyes off your goal.  If you are looking at your net worth and have concerns, then it could be time to make some changes. It may make sense to downsize your home, cut costs in other ways, or figure out how to sock away more retirement savings. 

How Often You Should Calculate Your Net Worth

Often changes in your net worth are gradual. For many homeowners in the last couple of years, however, this was the exception and not the rule. For example, Bucks County, PA home prices saw an average increase of 13.1% in October 2022 over a year ago! Since most people’s greatest asset is their home, this means that many have seen a significant increase in their net worth over the last year.  

It’s a good idea to meet every 1- 3 years with your CPA to discuss what is happening with your net worth and what you can do to keep your retirement plans on track. But when you are going through major life events like getting married or divorced, buying a home or receiving a sizable inheritance, don’t wait to consult your CPA. Also, as you get closer to retirement, you will want to have this discussion more frequently with your CPA.

Understanding your net worth and its implications for retirement can bring on a lot of questions about the future. By starting early, you can make the necessary mid-course changes to create the retirement you desire.

Your CPA will provide you with invaluable tax strategies to guide you in your current stage of life as well as into your retirement years. 

To begin working with a CPA to plan your retirement consider sending us a message by clicking here.