Planning Your Retirement: Calculating Your Net Worth

Non-liquid assets. The value of these assets is generally harder to gauge. 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. Once you have added up the value of your assets, subtract the amount of your debt and other liabilities. These 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 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. 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

Worrying about your net worth on a day-to-day, month-to-month or even a year-to-year basis isn't necessary as long as you have a sound long-term investment strategy and financial plan in place. However, changes in life happen and your financial situation evolves over time. As you experience certain life events that can impact on your net worth, 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 could include like 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 your long-term financial goals changed? Does your current net worth put you closer to or further away from your goals?
• Have your anticipated cash flow needs changed? When and how much money do you need?
• Does your current financial situation foreshadow a change to your investment time horizon? If your goals or needs have changed, does your current investment time horizon give you a realistic period to achieve your goals?

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