980. Laura answers a listener's question about building enough net worth to retire on time.
980. Laura answers a listener's question about building enough net worth to retire on time.
Find a transcript here.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! I love hearing from you; so, if something finance-related is on your mind, leave me a voicemail at 302-364-0308.
You can leave your name or remain anonymous, like today’s caller, who says, “I’m enjoying the podcast and started tracking my net worth using your Personal Financial Statement (PFS) download. How do I know if I’m on the right track or have a net worth that’s high enough for my age, which is late 40s, if I want to retire in my mid-60s?”
Thanks for your smart question, anonymous caller! And congratulations on creating your PFS and tracking your net worth. It’s one of the most important financial actions you can take, especially as you get closer to your target retirement age.
This post will review how to figure out your net worth, rules of thumb for what’s “normal” in the U.S., and the minimum wealth you typically need for retirement.
To get my PFS download that the caller mentioned, visit LauraDAdams.com and sign up for The Money Stack, my Substack newsletter. Free subscribers automatically receive my Money Success Toolkit, which includes a PFS template to track your net worth.
How to calculate net worth
Many people hear the term “net worth” for the first time when someone describes a celebrity's wealth. For instance, Oprah Winfrey is worth about $3.2 billion, and Jerry Seinfeld is worth $1.1 billion, and so on. However, net worth is a critical number to calculate and monitor even when you’re not famous or ultra-rich!
Here’s a short excerpt from my book and audiobook, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, that explains net worth and how to determine yours:
The first step on any journey is to assess the situation. You have to be clear about where you are right now and where you want to go. So, we’re going to really assess where your finances are right now.
Being clear about your current financial situation can be difficult and even a little scary, especially if you’re struggling with debt and don’t want to face it. However, embracing reality makes it easier for you to make positive changes.
The first priority in assessing your financial situation is getting organized so you understand your level of financial fitness. I’ll explain how to easily create an essential tool to track your finances throughout your life.
I call it your Personal Financial Statement, or PFS. It’s critical for gauging your financial health because each time you update it, you calculate your net worth. What exactly is net worth? you may be wondering.
The definition of net worth is summed up in a very simple formula: Net worth equals assets minus liabilities. Let me define what that means.
Your assets are things you own that have real value. Your liabilities, on the other hand, are the opposite of your assets. Liabilities are your financial obligations to others. When you subtract your total liabilities from your total assets, you’ve figured your net worth. It’s really that simple.
Here’s an example: If you own $200,000 in assets, but have $175,000 in debts, your net worth is $25,000. If you have $200,000 in assets and $200,000 in liabilities, your net worth is zero. And if you owe more than you own, such as $200,000 in assets and $250,000 in liabilities, your net worth is negative $50,000.
Since everyone’s financial situation is unique, there’s not a magic net worth number that you should have, but the higher the better.
Net worth is an important number because it reveals your bona fide financial resources at a given point in time. Tracking your net worth keeps you focused on increasing your assets and shrinking your liabilities, which is the key to building wealth. In this book, our focus is on how to reduce debt or the liability side of the equation.
We’ll cover exactly how to add your assets and liabilities to a PFS so you can calculate your net worth and really measure the health of your finances. I recommend updating it regularly, perhaps annually or quarterly. It’s the best way to get a complete view of your current situation and should be your financial “reality check”—something like stepping on the scale if you’re watching your weight.
As you update your PFS in the future, you’ll be able to track whether your net worth is increasing, flat, or decreasing. The goal is to gradually increase your net worth by reducing and eventually eliminating your non-essential debts. When you see your net worth increase slowly over time, pat yourself on the back and know that you’re making the right financial decisions.
How to compare net worth
Once you calculate your net worth, you’ll probably be like the anonymous caller and wonder if it’s high enough for your age or stage in life. The Federal Reserve publishes net worth statistics by factors including age, education, and homeownership. So, you can analyze net worth through a variety of lenses.
While age can be a useful way to think about a net worth goal, don’t get upset if you’re behind the U.S. average for your age. You can’t change your past financial life. Your job is to stay focused on what you accomplish with your money going forward.
Based on the most recent data, U.S. households have an average net worth of $1.06 million. That’s a pretty high number because it’s heavily skewed by super-rich households with extremely high net worth, like Oprah's and Seinfeld's.
A better benchmark is the median net worth, which is the middle value, where half the households have higher net worth and half have lower net worth. The U.S. median net worth is $192,700.
Since older folks generally earn higher pay, have more work experience, and save more, they have higher net worth than younger people. So, it’s important to examine net worth by age groups.
Net worth in your 30s
Your thirties are an important time in your financial life. You might be getting married, starting a family, or buying a home, and see your expenses rise significantly. If you can rein in costs while your income goes up, you can build significant net worth. Likewise, if you go deep into debt and live beyond your means, your net worth will stay flat or go down.
According to the latest data from the Federal Reserve, in 2022, the average net worth for U.S. households under age 35 was $183,400, and the median net worth was $39,040.
For those in the age range of 35 to 44, your average net worth was $548,100, and the median was $135,300. Again, remember that the average is skewed by a small number of very wealthy households. If you’re like most people, you have student loans or a home with little equity, both of which can drag down your net worth.
While you may not be able to eliminate much debt in your thirties, you can make a savings goal to build wealth. A good target is to accumulate the equivalent of your annual salary by age 30 or 35.
For example, if you earn $50,000 a year, try to have at least that much in your bank savings and retirement accounts before your 30s come to an end. Make it a habit to save money on a regular basis, even if you can only save small amounts. It will really add up and lay a rewarding foundation for your future.
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Net worth in your 40s
As your career progresses and you build experience, you typically have the opportunity to earn more in your forties. Plus, you may own real estate that you’re paying down, and that’s also appreciating. That can turbocharge your net worth.
However, this is also a decade when you may launch kids out on their own or to college. Be sure to protect your wealth and don’t overcommit to student loan debt and expenses. Your children have the opportunity to apply for scholarships, take student loans, and work while they’re in school.
The Federal Reserve reported that the average net worth of households aged 45 to 54 was $971,300, and the median was $246,700. A good savings goal during your 40s is two times your annual income.
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Net worth in your 50s
By the time you’re in your 50s, you’ve had three decades to contribute to a retirement account and build savings. Starting at age 50, you qualify to make additional “catch-up” contributions to most types of retirement accounts, such as a 401(k), 403(b), and IRA.
This decade is also when many people enjoy their peak earning years. You may also have mortgages and other debts finally paid off. Therefore, this is the time to really step up your savings to four times your annual income.
The Federal Reserve reports that the average net worth for households aged 55 to 64 was $1.6 million, with a median of $364,270.
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Net worth in your 60s
Most people in their 60s are seriously considering when and how to retire or semi-retire with a second career. You may not have dependents counting on you for financial support or much debt at this point.
Your 60s are a good time to downsize your lifestyle to reduce your overall cost of living as you glide into retirement. If you qualify for Social Security retirement benefits, you must decide whether to take them early at age 62 or to wait for a higher benefit at your full retirement age of 66, 67, or beyond.
The amount you can save in your 60s depends on whether you’re still working and whether you’ve accumulated a nest egg that’s large enough to last the rest of your life. A wise savings goal is to have accumulated at least eight to 10 times your salary during this decade.
The Federal Reserve data show that the average net worth for Americans aged 65 to 74 was $1.8 million, and the median was $410,000. By this time, your net worth is an indicator of the type of lifestyle you can enjoy in retirement.
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How much net worth do you need to retire?
Now that you understand what net worth is and how it relates to your financial future, let’s get back to the anonymous caller’s question about having enough to retire.
The 2022 Fed data I’ve reviewed is by household. It’s no surprise that wealth is correlated with family structure, such as being married, single, or having children. Having more earners or lower living expenses allows a household to build a higher net worth.
The caller didn’t mention being single or in a couple. I recommend completing the Personal Financial Statement for everything you and any partner own and owe, and then comparing your combined net worth to the median household net worth for your age.
Most couples need to accumulate at least ten times their household income to generate enough retirement income. So, if you’re married and have one breadwinner who earns $100,000, having $1 million is a wise minimum goal to maintain your lifestyle in retirement. If you and your spouse or partner have a household income of $150,000, you might aim for a combined nest egg of at least $1.5 million.
However, if you plan to significantly increase your spending in retirement, such as by traveling or owning a second home, you may need a much higher retirement account balance. Likewise, if your dream is to simplify your life and downsize, you may need a smaller nest egg to be comfortable.
It’s reasonable to assume that you could get a 5% return on your invested wealth in retirement. For instance, if you have $1 million growing in a retirement account or brokerage, you could likely count on earning $50,000 to safely spend.
The “4% Rule” is a well-known guideline for how much retirees can withdraw from their nest egg to ensure it lasts a lifetime. However, the right number could vary from 3% to 5%, depending on factors like your health, investments, and retirement age.
In addition, if you or a spouse qualifies for Social Security retirement benefits or a workplace pension, you’ll have that additional income. But delaying Social Security until your full retirement age, or even until age 70, means collecting a larger monthly benefit for life.
There are some terrific online calculators to figure out when your net worth will be high enough to hit your retirement goal. A couple of my favorites are the AARP’s Nest Egg Calculator and various options at Dinkytown.com. If you discover that you’re not on track, you may need to delay your retirement age, radically decrease your cost of living, or step up your savings rate.
Don’t miss my recent show, 7 Retirement Rules Changing in 2026, so you understand how to get the most out of tax-advantaged retirement accounts that can help you reduce taxes and build wealth faster.
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Holly Hutchings is our director of podcasts, Morgan Christianson is our advertising operations specialist, Rebekah Sebastian is our marketing and publicity manager, and Nathaniel Hoopes is our marketing contractor.