Forget About Your Net Worth When Retirement Planning

Back in October 2015 I posited that net worth is a useless metric, particularly with respect to retirement planning. I argued that at the end of the day, the only thing that really matters is how much income you can generate from your passive and portfolio sources. Measuring net worth often distracts people from this reality.

Primary Residences and Vehicles

Two ‘assets’ that people love to include in their calculation of net worth are their homes (I’m referring to primary residences and not rental or investment properties) and automobiles. For too many people the value they assign to their home and vehicles form a significant amount of their net worth.

As an example, let’s assume a couple has paid off both of their vehicles, has some equity in their home, and is 15 years away from retirement. Let’s further assume they have no credit card debt, no student loans, Kelley Blue Book informs them their vehicles are worth a combined $15,000, and based on the loan balance on their home and a projected value provided by Zillow, they estimate they have $65,000 in equity.

Family Vehicles – Paid in Full

Considering they aren’t retiring for 15 years, what good does it do to assign a value to their home and vehicles right now? Unless they plan on selling those cars and the home – and not replacing them – those ‘assets’ won’t be generating any monthly income … now or in retirement.

Passive and Portfolio Income

Continuing with this couple, let’s take a look at what will be their passive and portfolio sources in retirement. Let’s assume they aren’t positioned to receive any passive income outside of Social Security (let’s say their combined annual benefit will be $30,000) and their savings (e.g. checking account) and investments (e.g. Roth IRA) total $5,000.

Combining the projected values of their home and vehicles, and their savings/investments, their net worth would be $85,000. That looks pretty good, but only $5,000 of that will have any relevance as they slide into retirement.

Perhaps there is a second couple – also 15 years away from retirement – out there who only have $2,500 equity in their home and vehicles, are projecting a combined $30,000 in Social Security benefits; and have $25,000 between a checking account, an IRA, and a 401(k) for a net worth of $27,500.

Who’s in a better position with respect to drawing retirement income? The answer is obvious.

With all that said, and although I have long railed against focusing on net worth, I recently decided to add a Net Worth table to the workbook I use to track and manage my finances. I did so because I thought it might be interesting to track it and watch it increase over time. However, when I look throughout my workbook I understand the relevancy of the various bit of information. I know that the only relevant entry, with respect to generating portfolio income in retirement, is the first entry in the table below.

Net Worth Table

Some notes on this table: The wife and I don’t have any credit card debt and both of our vehicles are paid for. Additionally, I anticipate the rental property will eventually be a source of retirement income as I will either continue to collect rent on the property or sell it at some point in the future and move the proceeds into an investment account. However, at this time the rental property does not figure into my active retirement planning and the only place it shows up in my workbook – comprised of seven worksheets – is the table above.

Final Thoughts

Do yourself a favor and stop focusing on net worth as a measure of how prepared you are for retirement. I’ll keep tracking my net worth and perhaps I’ll pat myself on the back when my table indicates the wife and I are millionaires. (At our current contribution rate, projected appreciation of our homes, and projected investment returns, I anticipate we’ll cross that threshold sometime during July of next year.) But of course I’ll be much more interested, and in a celebratory mood, when our investment portfolio crosses $1,000.000.00.

Instead of focusing too intensely on net worth, spend your time and energy minimizing your expenses and developing multiple streams of passive and portfolio income; those are the numbers that are truly relevant for retirement planning.

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

18 Comments

  1. Generally, I agree with you here. I track net worth to track progress, and I include our real estate, but for the purposes of retirement, I only look at our investable assets that create income.

    When we consider real estate, especially our principal residence, I don’t care about how it appears as an asset. It does play a role in the housing expenses line item, insofar as we do or don’t have a mortgage or rent to pay, but the actual assessed value only matters on paper. That value means nothing to us in retirement unless we’re selling! And since we plan to retire and age in that home, it won’t matter for a long while.

    • Great approach, my friend and our thinking is closely aligned. Thanks for taking the time to stop by and share your thoughts.

  2. As usual, a great stream of information on this topic JM. When KC and I crossed the magical “7 figure” number (excluding our home/cars, etc.) back in ’08, it gave us a warm fuzzy feeling for a few days but wore off when we came to grips on what that amount actually produced when long term inflation is taken into account. We, (KC and I) plan on using a 3% annual withdrawal rate when it comes to my eventual retirement. I heard a great quote from a CNBC analyst awhile back that said, “never use your house as a bank”. But, one thing that your readers really need to take into account when determining their retirement budget is the cost of health care.

    We had dinner the other evening with our neighbors and what they relayed to us on their monthly/annual healthcare costs was alarming. Since most are between the age of 60-65, i.e., not yet eligible for MediCare, the best deal they could fined on the exchanges was $800/month in premiums along with a $6,500 deductible. That’s over $16,000 out of pocket costs “before” insurance kicks in. And, their policies are not portable. They thought they were going to be able to keep their existing policies/doctors but the law didn’t actually allow that. These folks are retired CPA’s, lawyers, educators who thought they had everything lined financially but have been taken out at the knees in insurance costs. The news channels don’t seem to mention this segment of the population when it comes to health care issues/costs. The number of uninsured has thankfully declined since ’10 but it’s mostly on the backs of this segment of the insured population.

    You and I are extremely fortunate with TriCare and eventually the TriCare For Life MediCare Supplement when we reach age 65. My advice for your other readers that aren’t as fortunate as we are, is prior to pulling their retirement trigger, is to make absolutely certain when it comes to your retirement budget that they’ve thoroughly researched what their medical insurance costs/options are.

    P.S. Think we’ve stumbled upon another dinner topic? 🙂

    • As always, great input, my friend. “My advice for your other readers that aren’t as fortunate as we are, is prior to pulling their retirement trigger, is to make absolutely certain when it comes to your retirement budget that they’ve thoroughly researched what their medical insurance costs/options are.” Indeed! Healthcare and the associated costs is huge and absolutely needs to be a focal point of retirement planning.

      I see a night at Fleming’s in our future.

  3. Have to disagree on one point. An owned residence ( no mortgage ) does via “imputed rent” lower one’s cash flow needs. On that basis it most certainly does figure into retirement planning. Otherwise agree that net worth is a somewhat useless metric for retirement planning.

    • Absoutely agree that lowering income needs in retirement- whether it be by owning one’s primary residence – or otherwise is a part, a critical part, of retirement planning. In fact, one aspect of my plan is to have my primary residence paid off about 1.5 years prior to retiring.

      Thanks for stopping by and sharing your thoughts.

  4. I still believe that Net Worth is worth tracking. Having said that, let me qualify with Liquid Net Worth which would not include primary residence, cars, household goods, etc.

    If you want to see how your liquid assets are growing with debt factored in, net worth is the best option. For me, it showed that I was on track to have the assets needed to retire.

    • Your modification makes sense. In essence ‘liquid net worth’ is essentially your investment portfolio or investable assets. The key is to understand what information is important with respect to drawing retirement income.

      Great to hear from you, my friend and thanks for stopping by and sharing your thoughts.

  5. Very sober analysis, James. I include my home in my net worth calculation, but only use my savings and investments to calculate our safe withdrawal rate. And you’re spot on about multiple revenue streams. Pension + Social Security + dividends + rental income + blogging income = happy retirement.

    • My approach is that a home (your primary residence) is a place to relax and enjoy time with family and friends … anticipated profits from a sell should not form the foundation, or even be thought about to any significant degree, when conducting retirement planning. I continually stress to family and friends it’s all about the number of income steams, particularly in an environment where defined benefit plans are growing more rare and many that still exist, whether public or private, are under pressure.

      Thanks for stopping by and sharing your thoughts, my friend.

  6. Great thoughts James. I definitely track my overall net worth, but when projecting and planning my retirement I definitely do not include any non-revenue generating assets, like our vehicle. It makes my net worth look smaller, but net worth is less important to me.

    While overall net worth is secondary, I do like to track it, including non-revenue generating assets, because I can see the impact that all of my financial actions have. For example, paying down a liability (say a student loan) drives my net worth up. Like Fritz mentioned above, I feel better informed about my situation by knowing the impact my choices have. I feel it helps me make better decisions.

    • More terrific food for thought and it seems as though your approach is very similar to mine … track net worth but understand its relationship (or lack thereof?) to generating retirement income. Thanks for stopping by, my friend.

  7. Totally agree. Net worth gave me a warm and fuzzy feeling the first time I was able to call myself a millionaire but it really is meaningless. I think it also gives a lot of people a false sense of “safety” approaching retirement.

    Funny fact: quicken counts your inventory as part of your net worth. Who knew that 70s playboy collection was going to pull you into riches. Lol, only the owner thinks it’s worth that much.

    • Thanks for sharing your thoughts, my friend. If pressed, I would say net worth can provide a general guide to how an investor is doing. However, we’re in complete agreement that it means nothing with respect to retirement planning.

  8. James, I agree that “income generation” is what matters, but I still think Net Worth tracking brings value. What I’ve done on my Net Worth statement is categorize my assets into “income generating” vs. “use assets”, with a subtotal for each.

    I them multiply my “income generating” assets by various withdrawal rates (2.5, 3.0, 3.5 and 4.0%) to show what range of income I can expect from those assets. Works for me.

    • Your focus on ‘incoming generating’ assets makes my point with respect to retirement planning. You note that tracking net worth provides some value; what value is that? Would love to get your thoughts, my friend.

      • James, the main value I see of the Net Worth statement is that is still drives good financial decisions. Even if you’re dealing with a car, understanding it’s impact on your net worth can have a major impact on your purchasing decision.

        Over time, the Net Worth statement, if used correctly, will drive “value creating” behavior, which ultimately leads to more wealth, and income generation over time.

        • If approached the way you describe, as a driver of ‘value creating’ behavior, it may have some merit. I’m absolutely a fan of anything that improves wealth generating actions which. Thanks for offering your thoughts, my friend.

Leave a Reply

Your email address will not be published. Required fields are marked *