Imagine you just landed in an unfamiliar city and now have to drive a rental car to your hotel. Do you want a car with GPS navigation or would you rather wing it? Seriously, how hard can it be to find your way around Hong Kong? A net worth calculation is like GPS for your retirement savings. It tells you where you are now and which way you need to go to get to your destination.

Key Takeaways

  • Calculating net worth involves adding up all of your assets and subtracting out your debts.
  • There's no hard rule for determining your "right" net worth, but you should know if it's headed in the right direction, towards a comfortable future.
  • If it's not, it's time to cut your spending, reduce your debt, or both.

Below, you can determine your current net worth. Then, find out how you can use this calculation to keep your retirement plans moving in the right direction.

How to Calculate Your Net Worth

Net worth is simply the total dollar value of all assets minus all liabilities. It's a benchmark for measuring financial health that is applied to companies as well as individuals. The formula is a simple one:

Net Worth=AssetsLiabilities\begin{aligned} &\text{Net Worth} = \text{Assets} - \text{Liabilities} \\ \end{aligned}Net Worth=AssetsLiabilities

That's just two columns of numbers, and here's what goes into each column.

  • Assets: You have both liquid assets and illiquid assets. Liquid assets are investments or possessions that can be turned into cash relatively quickly with little or no loss of value. Bank accounts, certificates of deposit, stocks, bonds, mutual funds, and similar investments fall into this category. Illiquid assets are investments or possessions that are difficult to convert into cash quickly. If you own your own home, it's an illiquid asset, as are any other real estate holdings, the balance in a retirement savings plan, and partnerships in businesses. They are not easy to convert to cash. Most personal property, such as furniture, vehicles, and clothing, should be left out. They may have cost a lot to acquire but are likely to be worth little in a resale. Investment-quality art or collectibles might be considered assets.
  • Determining Liabilities: The other side of the ledger lists your debts. Credit card balances, car loans, home mortgages, outstanding student debt, and business loans all fall into this category. Any personal loans count, too.

Add up all of your assets, subtract the total of your liabilities, and you've got your current net worth.

Where Do You Stand?

You may be interested in comparing your net worth with the figures in the chart below of median and mean net worth of all Americans by age group, compiled from a survey for the Federal Reserve. The median is the middle number. Half have less net worth, and half have a greater net worth. The mean number is the average net worth.

Don't place too much importance on your net worth total in comparison with these numbers. This is national data with no demographic breakdown. For instance, living in the Northeast versus the South nearly doubles net worth. People in the Northeast generally earn more and pay more to keep roughly the same standard of living.

Age of Head of Household Median Mean
18-24  $4,395 $93,983
25-29 $8,972 $39,566
30-34 $29,125 $95,236
35-39 $40,667 $257,582
40-44 $87,843 $316,661
45-49 $105,717 $599,194
50-54 $137,867 $838,703
55-59 $168,044 $1,150,037
60-64 $224,775 $1,180,378
65-69 $209,575 $1,056,484
70-74 $233,614 $1,062,428
75-79 $242,700 $1,097,415
80+ $270,904 $1,039,818
Figure 1. Household net worth in 2016, data from the Federal Reserve's SCF

Also, note the big differences in mean and median net worth in each age category. Remember that the mean number is the average number. A relatively few very affluent people can skew the average. That may be why the mean net worth of Americans ages 18 to 24 tops $90,000. At least in this age group, the median of $4,395 may more accurately reflect the net worth of young Americans.

The Ideal Number

How much should you be worth? Every person has a unique lifestyle and individual expectations, so there is no one-size-fits-all, universally agreed-upon number. That said, Thomas Stanley and William Danko, authors of The Millionaire Next Door, have offered this formula as a rule of thumb:

Net Worth=Age×Pretax Income10\begin{aligned} &\text{Net Worth} = \frac{ \text{Age} \times \text{Pretax Income} }{ 10 } \\ \end{aligned}Net Worth=10Age×Pretax Income

Your pretax income multiplied by your age, then divided by 10, equals your net assets.

Using this formula with a basic salary of $25,000, we get the following results:

Age Income Net Worth
20 $25,000 $50,000
25 $25,000 $62,500
30 $25,000 $75,000
50 $25,000 $125,000
60 $25,000 $150,000
Figure 2. Net worth, income constant

The numbers in the middle age ranges look feasible, but the formula doesn't work for people just starting out in life. Few 20-year-olds have racked up $50,000.

Then again, most professionals, if all goes well, see a steady increase in salary over the years. Below, the same formula is used but higher income levels for upper age ranges are entered. The results are dramatically different:

Age Income Net Worth
20 $25,000 $50,000
25 $35,000 $87,500
30 $50,000 $150,000
50 $55,000 $275,000
60 $75,000 $450,000
Figure 3. Net worth with increasing income

The net worth estimates are still unrealistic for very young workers, and they're not great for people approaching their retirement years. Still, the numbers may provide a benchmark for consideration. If you are doing better than the benchmark, you are at least moving in the right direction.

One formula suggests that your net worth at age 70 should be 20 times your annual spending.

Interestingly, under the scenario in which income rises with age, the net worth estimate delivers results similar to those generated by a formula devised by David John Marotta, a widely-quoted financial advisory.

Marotta recommends following a savings plan that will result in a net worth that is 20 times annual spending by age 72. Under this plan, the older you get, the more you save. Since most people earn more as they grow older, that is not unrealistic.

Age Income Savings

vs. Annual Spending

Annual Spending Net Worth*
30 $25,000 1x $15,000 $15,000
35 $35,000 2x $20,000 $40,000
42 $50,000 4x $35,000 $140,000
51 $55,000 8x $40,000 $320,000
66 $75,000 16x $50,000 $800,000
Figure 4. Ideal net worth and spending targets.
*Net Worth = Savings Amount x Annual Spending

Building Net Worth

Formulas and averages can provide some insight into the issue of net worth, but absolute truths are harder to reach. At the most basic level, a positive net worth is better than a negative net worth, and a higher net worth is better than a lower net worth.

If your net worth is negative, strive to get it to a positive number. You're spending more than you earn. Cutting your spending is the first step toward turning the situation around. Paying off debts is the next.

Even if your net worth is low, you can strive to build your net worth through saving and investing, a little at a time. Focus on maximizing the amount you save and minimizing the amount you spend.

If your net worth is high, keep building on the momentum. You're working towards a real improvement in lifestyle: enough money to live well during your retirement years.