When people talk about retirement planning, it’s common to hear the term “net worth” tossed around. And it’s natural to track your net worth with the hope of growing it over time.
But if you want to set yourself up for a secure retirement, net worth isn’t the figure you should be focusing on. Instead, you should focus on a completely different number — your savings.
Image source: Getty Images.
To understand why you shouldn’t focus on net worth in the course of retirement planning, it’s important to understand how that number is calculated. Your net worth is the total of your assets minus your debts.
Let’s say you have the following assets:
A home worth $500,000
An emergency fund of $50,000
A retirement account with a $450,000 balance
All told, that’s $1 million in assets. If you also owe $200,000 on your mortgage, your net worth is $800,000.
The reason you shouldn’t use your net worth to measure your retirement readiness is simple. Not every asset of yours becomes spendable cash in retirement.
Take your home, for instance. You might have $300,000 worth of equity in it. But unless you sell that home or borrow against it, you don’t have a way to convert that equity into money you can use to pay bills.
Accounts like IRAs, 401(k)s, and brokerages, on the other hand, can be used to fund your retirement. You can cash out investments for money or spend the dividend or interest payments you receive.
Similarly, any money you have in a savings account is money that can help pay for your retirement. That’s why it’s these accounts you should focus on when determining whether you’re ready to retire — not your net worth.
Another reason not to focus too much on net worth in the course of retirement planning? In recent years, home prices have risen rapidly in much of the country. But at some point, home prices could creep downward, impacting many people’s net worth.
Let’s return to our example. A home worth $500,000 with a $200,000 mortgage gives you an $800,000 net worth when coupled with $50,000 in savings and $450,000 in an IRA or 401(k) plan. But if your home value drops to $400,000, your net worth drops to $700,000.
This isn’t to say that you can’t use home equity to your advantage in retirement if you need to. But generally speaking, you can’t spend your net worth the same way you can spend cash and investments. And since your retirement depends on assets that can serve as a reliable income source, it’s important to know what number to look at when figuring out whether you’re set for retirement or need to work and save longer.
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $23,760 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after.
Many Americans leave money on the table in retirement. Learn more about these retirement strategies and more, available when you join Stock Advisor.
View the “Social Security secrets” »
The Motley Fool has a disclosure policy.
Planning for Retirement? Here’s Why Your Savings Matter More Than Your Net Worth. was originally published by The Motley Fool
