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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."

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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 same day.

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 insurance.

"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 business loans.

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 retirement.

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 in savings.

Check out the net worth worksheet provided by Marotta Asset Management.

-- Updated: Dec. 7, 2004




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