What do you need to retire?
My view is that wealth is more than just the tangible asset or number we see on a net worth statement. I believe it’s deeper than that. Understanding the numbers is certainly important, but to truly measure wealth, we must consider intangible items like being able to invest time in your family and community, and leaving a worthwhile legacy to future generations. However, knowing what net worth you need to retire comfortably and maintain your lifestyle is still important.
Net worth is the value of the assets a person owns, minus the liabilities they owe. It is an important metric to gauge a person’s financial health, providing a useful snapshot of his or her current financial position. Assets generally include bank accounts, investment accounts (non-retirement and retirement), home value, car values, business interests, and other high-value personal assets such as boats, campers, jewelry, collections, etc. Liabilities generally include balances on credit cards, auto loans, home loans, student loans, personal loans, or other loans.
The amount a person or couple should have in net worth when they retire is very specific to their situation. The amount you plan to spend in retirement is a huge factor in determining the amount you need to have when you retire. Many academic studies have shown around 4% to be the safe withdrawal rate for a 30-year retirement. So, for someone that plans to spend around $60,000 a year from their investment portfolio, having $1,500,000 in investable assets is a good target. Your net worth should be higher than that because some of your net worth comes from assets that are illiquid like your home. We would not include the house value in the $1,500,000 you need to fund expenses because, likely, you will be living in the house during retirement.
It’s important to understand what assets are liquid – such as cash, mutual funds, stocks, or bonds compared to illiquid – such as business interests and homes. If you will need to use illiquid assets to pay for living expenses in retirement, you will need to plan how you will make those assets liquid. You may have heard of people being house rich and cash poor in retirement. That is a great recipe for being stressed out in retirement.
If you’re interested in learning more about your specific and unique financial situation, please don’t hesitate to call me or one of my partners. We’re here to help. I work to help you simplify your financial life. Personal finances are complicated to start with, so I focus on simplifying the entire process and prioritizing the things you can do to improve your financial situation. You want to optimize, not complicate your financial situation – especially in retirement!