A balance sheet is a financial statement that provides a snapshot of a company’s financial condition at a specific point in time. It shows what a company owns (assets), what it owes (liabilities), and the difference between the two (equity).

This financial instrument provides a good tool for us to understand our own personal financial health. In fact, we can rearrange the classic formula of Assets = Liabilities + Equity to represent what matters most to us as we consider retirement.

Net Worth (aka “Equity”) = Assets – Liabilities

What is Net Worth?

Net worth is the total value of all assets owned by an individual minus the total value of all liabilities owed. The easiest way to think about net worth is the following: how much money would you have left over if you sold everything you own and used the money to pay off all of your debts. Would you have money left over (positive net worth) or would you still owe someone money (negative net worth)?

To calculate net worth, you simply add up the value of all your assets and then subtract the value of all your liabilities. For example, if you have $2,000 in your checking account, $10,000 in your emergency fund, $50,000 in investments, and $200,000 in property, and you owe $120,000 in mortgage debt, $40,000 in college loans, and $10,000 in credit card debt, your net worth would be $92,000.

Below is a chart demonstrating this sample net worth calculation.

Interpreting the Results

When considering net worth in terms of retirement planning, it’s important to remember that not all assets have the same liquidity (ability to act like cash).

In the example above, the house is valued at $200,000 while the equity of the house (house value minus what’s still owed) is $80,000. In terms of understanding your overall financial health, this is good information; however, when considering retirement, it may not be ultimately helpful – such as in instances where you want to stay in your current home throughout retirement.

Even if you want to sell your current house, you have to live somewhere, so part of the existing equity will need to be repurposed for that need.

Of course, living on a cruise ship full time does have its merits…

How Do I Use This?

Understanding your net worth is a crucial aspect of retirement planning. The first time you run your numbers may be daunting – like going to the dentist not knowing if you’ll get a clean bill of health or if a date with a drill is in your future.

A positive net worth is certainly exciting, especially when you can see exactly how many resources you have to support retirement. Here are some the main advantages:

1. Goal Setting. Retirement is a great time to engage in new hobbies, travel, and volunteer. This calculation helps you understand how well (and for how long) you can fund these future plans.
2. Readiness. Net worth is a point in time assessment and provides a clear understanding of your overall progress towards your retirement goals. Like plaque buildup on your teeth, it can help you identify debt that needs to be removed.
3. Peace of Mind. In my youth I watched a G. I. Joe cartoon in which the main character always closed the show by saying, “Now you know. And knowing is half the battle…”. Knowing your financial position brings peace of mind, it shows progress (or lack) over time, and can serve as a motivator to improve.

Keeping Up with the Jones

Every three years, the Federal Reserve Board conducts the Survey of Consumer Finances to gather data on family incomes and net worth. Their latest survey was released in October 2023 and the data provides some interesting insights on American’s net worth.

The average net worth of households in the United States is $1.06 million. This sounds like a lot!  However, this figure can be misleading due to the influence of a small number of very wealthy households. A better measure of household wealth is the median net worth, which is $192,900. This means that half of all households have a net worth of either more or less than $192,900.

That may seem like a big or small number depending on where you are in your retirement journey. One of the questions that is often asked is, how much should I have to retire?  While that answer is too long for this post, knowing your net worth will answer how close you are to the answer once it’s been defined.  We’ll address that topic in another post.