Retirement is a dream for many that everyone hopes to experience without worrying about their finances. However, to ensure a comfortable retirement lifestyle, you need to build a suitable retirement corpus over the years. Fortunately, you can easily safeguard your tomorrow without compromising on your present with a little planning. If you achieve a specific net worth at your retirement age, you can help ensure that you live a financially secure retirement.
Your net worth is the total of all your cash, liquid holdings, and other assets minus any debts or other financial liabilities. Liquid assets are investments or holdings that can be converted into cash quickly without impacting the value. This includes your bank accounts, mutual funds, stocks or bond holdings, certificates of deposits (CDs), and other investments. However, your net worth also comprises your illiquid assets, such as home, real estate holdings, partnerships in business, retirement savings account balance, and more. Personal property items like furniture, clothing, etc., are not considered a part of your net worth, even if they are expensive. That said, collectibles, antiques, and top-quality art can be a part of your net worth. Alternatively, your debts would include credit card balances, mortgage, car loans, outstanding student loans, business loans, etc. Adding up all your assets and deduct your liabilities will help you assess your net worth.
Your net worth does not need to be equivalent to your peers. You have a unique lifestyle, income level, employment, individual expectations, inheritance, and cost of living. Hence, there is no fixed average net worth by age. However, different studies have different standards regarding the average American net worth. You can use the study’s findings to set a benchmark figure and aim to achieve it and strive for more to live a stress-free retirement. However, the idea is to at least try to meet the average net worth by age to ensure that you are on the right track towards a healthy retirement. Achieving a higher net worth than the average can be an added advantage for you. You could also seek guidance from a professional financial advisor who can help you assess your current lifestyle expenses and calculate how much money you would need to maintain a similar kind of lifestyle in retirement.
Here is a quick guide to what your net worth should be at retirement:
What is the average net worth at retirement?
The Federal Reserve Survey of Consumer Finances specifies the median and mean net worth for different ages comprising average investable assets by age. According to the survey, the average American net worth for different age groups is as follows:
Average net worth by age 30
According to the survey, the average net worth for those under 35 is $76,200, but the median net worth is $11,100. This is the stage when you would be just getting started in your career, paying off student debt, and might not have significant wealth. Hence, the objective is to at least achieve a net worth equivalent to half of your 30s income.
Average net worth by age 40
The Federal Reserve Survey of Consumer Finances highlights that the average net worth for people between ages 35 and 44 is $288,700, and the median is $59,800. Financial experts recommend that by the age of 40, you should aim to have a net worth that is at least two times your current income. Hence, if you make $70,000 a month, your average net worth at this stage should be $140,000. However, it is not necessary to hold this money in cash or stocks. You could achieve this net worth by investing in real estate, etc.
Average net worth by age 50
The Federal Reserve study points out that the average net worth for people between 45 and 54 is $727,500, and the median figure is $124,200. When you are in your 50s, you are close to retirement, and at this stage, it is advisable to have a net worth that is four times your salary. If you started saving early and invested smartly, achieving this net worth would not be a challenge. If you are far from the standard net worth benchmark, you can still modify your investment portfolio to take advantage of compound interest. You can consider adopting an aggressive saving and investing strategy and choose securities like alternative assets, etc.
Average net worth by age 60
60 is the age when you are almost stepping into the retirement phase. The average net worth for people between the ages of 55 and 64 is $1,167,400, but the median is $187,300. Financial experts suggest having a net worth of at least six times your annual salary. Hence, for instance, if you earn $100,000, you can multiply the amount by 6 to know your net worth target.
At this point, you are close to retirement, if not already retired. Therefore, you should aim to accumulate significant wealth to sustain during your non-working years. Further, depending on your standard of living and the state where you live, your average net worth at retirement could be higher or lower. As a common rule of thumb, you could aim to replace at least 15% of your pre-tax working income with your retirement corpus. However, if you have expensive retirement dreams like traveling, setting up your business, etc., you would need a much higher average net worth at retirement age. Alternatively, if you live or plan to shift to a more tax-friendly state and have simple retirement plans, you might suffice with a lower average net worth at retirement than the standard one. If you plan to take early retirement, you would need to acquire a much larger retirement corpus than those who plan to retire by 70 years or later.
Determining your average net worth at retirement
There is no standard net worth figure that can fit everyone’s needs. Your post-work life largely determines your average net worth during retirement. However, as a starting point, you could consider taking stock of your retirement spending rather than your income. Even though your retirement spending will be much lower than your current expenses, you could incur other additional costs in this phase, like higher medical expenses. According to the Organization for Economic Cooperation and Development, an average American pays $1,200 per year on prescription drug costs. These expenses are likely to rise at an average rate of 5.4% annually, which can be increasingly burdening for retirees.
In some cases, retiring with $1 million is feasible. However, if you have a high spending lifestyle, $1 million could be grossly insufficient to cover an increased retirement span. Financial experts recommend multiplying your current spending by 25 to roughly know the amount of savings you will need in retirement if you withdraw 4% of it every year to live a comfortable life without downgrading your spending lifestyle.
If you are in the accumulating stage, you can still increase your net worth by living within a budget, paying down debt, boosting your income, adopting a side hustle to earn more, adding more to your retirement and investment accounts, and more.
Can you retire with a low average net worth at retirement age?
If you are approaching your retirement and your net worth is far from what you should likely have for a comfortable retirement, you do not need to get disheartened. There are smart tactics that you can apply to improve your net worth.
Here are some retirement plan strategies that can help you easily fund your post-retirement life:
- Invest in a health insurance plan: One of the biggest expenses for retirees is healthcare. Medical expenses tend to consume a large share of your retirement savings, increasing the risk of outliving your corpus. However, if you invest in a smart health insurance policy, you would easily be able to shelter your retirement corpus and use it to fund only necessary expenses, even with a low average net worth at retirement. Avoid depending solely on Medicaid policies since they have restrictive coverage. Focus on supplementing your Medicaid policy with a private health insurance plan. Moreover, invest in a life care plan.
- Shift to a tax-friendly state: The state where you live has a significant impact on your retirement finances. Even if you have a low net worth, you would be liable to pay some taxes, as applicable for your tax group. However, in some states, the tax burden could be thousands of dollars more than in other states. Tax-friendly states like Tennessee, Colorado, Nevada, Arkansas, South Carolina, the District of Columbia, Hawaii, and Delaware have low state taxes. Among these, Delaware has an average combined state and local sales tax rate of 0%. Delaware also has no estate or inheritance tax, and its income tax range is also much lower than other U.S. states. Alternatively, some unfriendly U.S. states include Texas, Vermont, Nebraska, New York, Iowa, Kansas, New Jersey, and Illinois. You could consider spending your retirement in a more tax-friendly state as that reduces our retirement outlay. According to a report, living in a less tax-friendly state can result in $10,000 or more per year in retirement taxes compared to living in a tax-friendly state. If you have an average net worth at retirement, you could consider relocating to a tax-friendly state.
How to reach your net worth goal
If you are a decade or more away from retirement, you can work towards achieving at least the standard average net worth by age and then further increase the sum to reflect your standard of living. Here are some effective steps that can help you achieve your net worth goal:
- Live on a budget: The first thing to do to boost your net worth is to live on a budget.Try to save as much as possible and do not overspend. Segregate your needs and wants, and accordingly, allocate a specific portion of your income towards your spending in these categories. Ideally, your budget can assign 50% of your earnings towards your needs, such as rent, food, utility expenses, and more. 30% of your money can be spent on your wants like entertainment, dining out, online subscriptions, etc. The remainder of 20% can be directed towards savings and investments. You can set a savings target and aim to achieve the goal each month.
- Pay off your debts: A major element that lowers your net worth is debt. While some debt may be good for your financial situation, other loans like high-interest home loans, credit card bills, etc., should be avoided. Therefore, aim to keep away from debt, or if you have any pending liabilities, work towards eliminating the high-interest debt first or consolidating your small debts to reduce the interest burden and improve your overall net worth.
- Create an emergency fund: Having a financial cushion to keep you secure during tough times can improve your net worth in the long run. Hence, it is advisable to create an emergency reserve, which comprises at least three to six months of your living expenses. An emergency fund will ensure you do not consume your retirement corpus in an unforeseen circumstance and that your average net worth at retirement remains positive.
- Invest wisely: Another effective way to increase your net worth is by choosing the right investments. Investments, like stocks, selective bonds, etc., if made during the early years of life, can help you earn significant returns in the long term, owing to the power of compounding.
If you are near the standard average net worth by age, you can modify your approach to further increase your income to adapt to your lifestyle expenses. If your net worth is high, you can aim to keep building the momentum to have more than enough money to take care of your retirement needs. In contrast, in the case of low net worth, you can always benefit from cutting down expenses, paying off debt, and using other tactics of investing and saving to reach the benchmark net worth at retirement. You may not be able to build up to your dream net worth overnight, but effective and planned steps can help you make consistent and incremental growth towards achieving the average net worth at retirement age.
If you are confused about where to start or need help to boost your net worth over time, you can engage with a professional financial advisor and lay a strong foundation for your future financial wellbeing. Use Paladin Registry’s free advisor match tool and get matched with 1-3 qualified advisors who may be able to help you with your unique financial goals and requirements.
For further information on how you can effectively plan for your retirement using suitable retirement savings strategies, visit Dash Investments or email me directly at firstname.lastname@example.org.
About Dash Investments
Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.
Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.
CEO & Chief Investment Officer Jonathan Dash has been covered in major business publications such as Barron’s, The Wall Street Journal, and The New York Times as a leader in the investment industry with a track record of creating value for his firm’s clients.
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