How much are you really worth? -- Page 2
Assuming that you're going to want to retire at some
point, you need to be able to live off of your savings and whatever
income you may have -- a pension, for example. Current retirees
can count on their Social Security checks, but if your retirement
is 25 or 30 years in the future, it's best not to include that in
calculating net worth.
Generally, if you want to retire at age 72, and maintain
your current lifestyle, you'll need to have saved close to 20 times
your annual income, Marotta says. Expect to withdraw only about
5 percent of that annually.
Marotta recomputes the net worth statement every year
and has clients make whatever adjustments are necessary.
"They may need some belt -tightening or loosening.
Those adjustments are very small; often just $100 a month. But over
30 years that makes a huge difference."
Net worth statements are like cheesecake; different
everywhere you go. Some are too simple and too broad, while others
may be so detailed that you're not likely to complete it.
Marotta has compiled a reasonably detailed and easy
to understand method for computing net worth; something you can
do by yourself. He begins by creating four categories:
Liquid assets: Something of significant value
that can be sold in a matter of days. Include personal bank accounts
(checking, savings and money market), certificates of deposit, bonds,
mutual funds, stocks and exchange traded funds. Use values as of
the end of the last year so that all your amounts will be on the
Non-liquid assets: Something of significant
value that can't be quickly sold without penalty. This would include
retirement accounts (IRA, 401(k), 403b, Keogh, profit sharing plans
and pension plans). Also include any real estate investments, including
the market value of your home.
Other non-liquid assets can include interests in proprietorships,
partnerships or company stock in a firm that is not publicly traded.
Also include the cash value of any life insurance that is not term
"Some people include personal property such as
jewelry, collectibles, cars and boats in this category. While these
often have high retail value, their true worth is often a small
fraction of their initial cost. I recommend not including personal
property," Marotta notes.
Immediate liabilities: These are what you owe
to creditors -- credit card debt, car loan, student loan and any
other debt you have to repay within two years.
Long-term debt: For most people this would
be their home mortgage, but it may include other real estate or
To determine your net worth, do these three calculations:
Liquid assets + non-liquid assets = total assets
Immediate liabilities + long-term debt = total liabilities
Total assets - total liabilities = net worth
Marotta advises using the numbers you've just calculated
to compute emergency reserve, debt load ratio and progress toward
Emergency reserve: Subtract immediate liabilities
from liquid assets. Marotta says the result should be at least half
your annual income.
Debt-load ratio: Determine how much your assets
are leveraged by debt. Divide total liabilities by total assets
to calculate your debt load ratio. Marotta's guideline is that this
number should not be over 35 percent and your home mortgage should
comprise most of the debt. "If the number is below 15 percent
you are probably missing out on the leverage and tax benefits of
a home mortgage."
Progress toward retirement: As mentioned, Marotta
believes that folks who want to retire at age 72 need to have saved
approximately 20 times their annual income. To calculate your progress
toward retirement, divide your net worth by your annual income.
The answer is how many times your annual income you have amassed
Check out the net
worth worksheet provided by Marotta Asset Management.