How Do You Stack Up?

Along with politics, religion, and race relations, money is one of those things most people do not like to talk about. Recently I posted the value of my portfolio after a brief internal debate. One reason I decided to post the value was because of legitimacy. By that I was referring to the idea an individual that is writing about personal finance and retirement planning should be able to offer readers some insight into their own financial lives; some sort of ‘proof’ so to speak.

A quick side note, I like to look strictly at portfolio value (aka financial wealth) – which excludes things like home and car values – that are traditionally included in net worth, which is determined by subtracting the total dollar amount of all liabilities from the total value of all assets. My rationale? When you are ready to retire, who cares how much Kelley Blue Book believes your car is worth or how much Zillow believes your house is worth? Those numbers are largely irrelevant.

Lake Como Italy - Mariya Georgieva

What is most important in retirement is how much passive and portfolio income you will be receiving on  a monthly basis. In RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit I note that a good retirement plan starts with understanding how much you need on an annual basis to live the lifestyle you desire in retirement, and then constructing a plan to ensure passive and portfolio – sans earned income – can meet those needs. Perhaps portfolio value vs. net worth is a discussion worth having in a later post. Anyway, with that said, is there any value in knowing how your net worth stacks up against your friends, neighbors, or co-workers? I would suggest there is.    

While you do not want to get trapped in the game of keeping up with the Joneses (and likely accruing unsustainable debt) or basing your self-worth on a comparison of your net worth, knowing how others are doing financially – particularly within the context of similar income, age, etc. – can offer some insight into how you are doing. If others in your age group are making a similar income, yet have a net worth 3x yours, you might want to at least give some consideration to re-evaluating your investment plans. Conversely, if your net worth is 3x that of others that are demographically similar, you can take some comfort in the knowledge that you are probably doing a lot of things right already.  

Illustrated in a table, this is how American’s net worth looks. The median (middle) is the more useful number as the mean (average) is skewed higher by the insanely rich.

 Net Worth Table

And illustrated in a chart…

Net-Worth Chart

Source: Table 4 [Family net worth, by selected characteristics of families, 2001–10 surveys] of the Federal Reserve Bulletin, Volume 98, Number 2, dated June 2012.

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. There’s definately a lot to think about this issue. I like all the points you have made.

  2. I’m a bit below average excluding my house and car James but I have taken a couple of years out in the past to travel and spend all my money. I feel as though I’m on the right track to make it up in the next few years

    • You hit on a key point, the recognition that you are on the path you need to be, regardless of what others might be doing. It is important to find a balance between enjoying today – extensive travel is one good way – and financially preparing for the future. Thanks for stopping by and adding to the conversation, Robert.

  3. The Federal Reserve survey ended in 2010 and the results were published June 2012. Therefore, the gains of 2011 and 2012 are not reflected in these numbers. However, I don’t believe the overall numbers, particularly the spread between the medians and means, would be that significant.

  4. I have to agree with Paul. Wow, those numbers are low and yes it looks as if they are relying on Government funded entitlements to aid in their retirement. Maybe this is an old study? My husband and I will not count our home as part of our net worth because we aren’t sure at this point whether we are going to keep it or move. Still, I can’t believe those numbers. I am fortunate enough to have more than that saved at my age. I do not take this for granted because I know that something could happen to me or my job.

  5. Interesting article. I agree with James that value of a house and cars should not be included in a net worth calculation but if your plan, like Kay, is to downsize your home before retirement, then including the difference seems appropriate.

    The numbers in the table are interesting. I am surprised how low the median actually is. I guess it shows that people have other income sources in retirement and not just their assets.

    Since this article is seeing how you compare to others. I, like James, am in the 45-54 age bracket. My net worth is above the mean. I am retired.

    I wonder how living expenses compare among people in the same age ranges?

    • Great point with regards to other sources of income. Let’s hope that those with a lower median net worth will have significant sources of passive income. For my household, we are looking at five sources (active duty pension, civil service pensions x2, and social security pensions x2) to add to our portfolio income.

      Regarding living expenses, as I note in the post and in my book – laid out in the accompanying planner – for me that is really a key. In fact, for planning purposes, I recommend people start by asking themselves how much they believe they will need annually, including living expenses, in retirement. That number drives the construction of the plan.

      Thanks for joining the conversation, Andy. I hope you’ll stop by more often.

  6. I like to include home value in my net worth. The reason is that we will certainly be downsizing prior to retirement and will realize a gain in our net worth after selling the current home. The net worth table is very interesting with the mean so much higher than the median. There is significant net worth in many fewer households at the high end of the distribution.

    • For me, the problem with including homes and cars in a tabulation of net worth is that they really don’t communicate any relevant current information. Who can say with any amount of certainty what a house is really worth right now (an individual might believe it is worth $350,000 but the market says $285,000) less known in 10, 15, 20 years when they go to downsize as you note? True, while it is likely that the further you go out (10, 15, 20 years) the house will be higher in value. But how can you possibly know what that value will be? I believe it makes more sense to assume – probably correctly – that it will be worth more in the future without trying to assign a value. With regards to car values, they depreciate so quickly, why worry about what my car may be worth today if I plan to retire in 13 years?

      I have a primary residence and a rental property and my belief is that both have equity; and I plan on selling the rental property within 3-5 years of retirement. I do believe I will make money. However, do I really want to write down a hard number now and base investment decisions on what I think the house will sell for in 10 years? Ultimately, for planning purposes, I believe it is a lot better to not try and guess the value of a house or car – particularly its future value – and work with only the known…hard numbers in my savings and investment accounts. Better to be a little conservative in my estimation now and be pleased in the future if my house sells for x number of dollars as anticipated.

      Agree with your observation of the difference between the median and mean. While I am not surprised that there is a gap, it is wider than I would have guessed. The ultra-wealthy really do skew the numbers.

      Thanks for kicking off the conversation, Kay.

      • Great article. I find the median numbers disturbing. The median of ~$200K for a retiring 70 year old indicates a lot of people are going to be dependent on the government (or family) in the future.

        Given that the vast majority of Americans are chronically under saving for retirement, I understand your conservative approach in omitting real estate as a retirement asset. However, for people who are actively engaging in retirement planning (and executing their plans) I think it is prudent to include real estate that will be liquidated (or produce income) for retirement.

        Most Americans will under save for retirement, but there is also a risk in over saving. That risk leads to an unnecessarily lower quality of life than necessary. If I need $1M when I am 70, and I have $2M, then I could have taken more vacations, not had my sons share a bedroom, donated more to charity – whatever would have improved the quality of my life while I was working and doing the accumulating.

        Certainly it’s a much better problem to have too much money in retirement than too little, but proper planning could mitigate both problems.

        Predicting the future value of a real estate asset is generally easier than predicting the future value of an equity and/or debt portfolio. Like Kay, I plan to convert my residence to cash in the future, so it gets considered in my plan.

        As for other property assets (cars, boats, etc.) that constitute ‘net worth’, I don’t include them in retirement planning, but their value matters when it is time to transfer my estate, so I find it beneficial to know what they are.

        • Thanks for stopping by, Paul. There are certainly a number of ways to measure net worth and probably even more ways to go about retirement planning. While I have a high level of confidence that I would be able to sell my primary residence in 13 years when I retire, if I choose to, how do I truly go about calculating that now? My experience has been that most Americans tend to have a grossly inflated opinion of the value of their home. Like Robert Kiyosaki, until a house is paid for or sold – and the true gain realized – I view it as a liability and not an asset. I think there are those in the housing and banking industries that have a vested interest in selling people on the idea that their house is an asset…but perhaps that is another blog post.

          Also, if you sell your primary residence you obviously have to buy something else. For me, it is entirely too much guess work to apply a meaningful number to how much I can sell my house for in 13 years and how much a new house I buy (location unknown?) will cost. Similarly, while I have a high level of confidence that my rental property will likely be paid for and anything I sell it for will be profit, I believe trying to attach a meaningful number to it now is fruitless. There are already too many unknown variables (e.g. rate of return on investments, inflation, etc.) in retirement planning to add in something else that is largely a guess (hope?) if the selling of the house is more than a year or so out.

          Agreed on your assessment of property such as boats or cars. I don’t include them in my net worth calculation. However, if they are actually paid for, owned outright, I think a case could be made to include them in net worth. It just so happens that both of the vehicles in my household are paid for. However, while it does help to know their value – as you note with regards to estate transfer – they don’t really play any part in my retirement calculations as that point is 13 years off and they will certainly not be a factor at that point.

          Absolutely agree with the point regarding the low median net worth, particularly for older Americans, a point made by both you and Andy. It is disturbing and indicative of a significant portion of the population that will likely require some sort of public assistance.

          Thanks for the thoughtful comments, Paul. I hope to see you here on a regular basis.

          • You calculate the future value of a real estate asset in the same manner that you calculate the future value of a stock portfolio (or any other asset). You calculate a rate of return based on the historical performance of the asset class and multiply it by the number of years you will hold the asset. It’s no more or less mystifying than investing in TSP.

            My father-in-law has a stock portfolio worth about $14,000 and a real estate portfolio worth about $1.2 million. He tells me the same thing about stock investing that you tell me about real estate. 🙂

            • My question was more rhetorical than anything 🙂 I actually have numbers in mind for both my primary residence and rental property…I just elect not to include them in my portfolio value. If we assume – which I believe is the case – that the numbers in the table/chart from the Federal Reserve include property (e.g. homes, vehicles, etc.), then the numbers truly are depressing. That would mean that the only thing giving some people a positive net worth is the anticipated value of their property, which is primarily homes. That would suggest that a lot of people are putting a lot of faith in the belief that their home will increase significantly in value over the next 10, 15, 20 years and they will realize enough net gain – after purchasing a smaller home – to sustain them in retirement…along with their equity holdings of course.

              As an example, if we look at the last three age groups (55-64, 65-74, and >75) their median net worth is basically $180,000 – $200,000. If we further assume their houses are paid for – or nearly paid for – and those home values are $200,000? (I don’t know the average home value in America off the top of my head, but $200,000 seems conservative), that means that essentially their entire net worth is strictly their home. Not encouraging.

              Great stuff, Paul. You make a lot of good points and provide significant food for thought.

          • Good conversation and lots of good points here. To be clear, I include the value of my home and all tangible assets in the calculation of my net worth. It’s all my assets less my liabilities. But in regards to retirement planning, I tend to look only at the expected value of my retirement and other cash accounts. My retirement plans include the assumption that I will have no mortgage, because I am on track to accomplish that. I certainly will downsize and that will add to my cash on hand but I don’t explicitly have an assumption for that as I believe it is more conservative to leave that out – similar, I believe, to you James.

            • I probably did something of a disservice to the conversation by mixing in my reluctance to include property values in the calculation of net worth. I should have noted that I strictly look at portfolio (equities) value with regard to retirement planning and noted that is a different number than net worth as widely calculated. Like you, I assume I will have no mortgage when I retire. In fact, I can guarantee it.

              But you are right, Kay. It has been a good conversation that has provided food for thought. I am even thinking about including a separate worksheet to the workbook I use to manage my retirement planning, that includes property value. If nothing else, it will be interesting to compare it to the worksheet I traditionally use.

    • The problem with planning to downsize is that I know so many people that expected to do that in their 30s and 40s, but as they get older they are both more emotionally attached to the house with its history of bringing up their family and starting to think forward to grandchildren and family gatherings in the future.

      • Good point, Sara. Therefore, any gains they had calculated into their retirement plan are never realized. I will be interested to see the feedback as more people chime in. Thanks for taking the time to add another angle to the discussion.

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