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What Should Your Net Worth Be?

I recently received a voicemail question from an anonymous caller who says:

“Hi, Laura. I’ve really been enjoying the Money Girl podcast! I have a question about net worth and couples. I heard on a previous episode a guideline for comparing net worth to see how you’re doing as an individual. But how should I compare me and my husband together?”

This is a great question that I’ve never been asked. (And by the way, if you have a money question or comment, I’d love to hear from you. Just call our voicemail at (302) 364-0308 to leave your message.)

In this episode, you’ll find out what net worth is and if you’ve accumulated enough wealth as an individual or as a couple. Plus, I’ll give you a free tool that makes it easy to figure your net worth and track it over time.

What Is Net Worth?

You probably heard the term “net worth” as it relates to super-rich celebrities or famous CEOs. Like Beyonce has a net worth of $500 million or Jeff Bezos is worth $133 billion. But what you may not realize is that even for the rest of us non-famous folks, it’s important to calculate and monitor your net worth.

Here’s an excerpt from my new book and audiobook, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, that explains net worth and how to determine yours:

The first step on any journey is to assess the situation. You have to be clear about where you are right now and where you want to go. So, we’re going to really assess where your finances are right now.

Being clear about your current financial situation can be difficult and even a little scary, especially if you’re struggling with debt and don’t want to face it. However, embracing reality makes you better able to make positive changes.

The first priority in assessing your financial situation is getting organized so you understand your level of financial fitness. I’ll explain how to easily create an important tool to track the state of your finances throughout your life.

I call it your Personal Financial Statement, or PFS. It’s critical for gauging your financial health because each time you update it, you calculate your net worth. What exactly is net worth? 

The definition of net worth is summed up in a very simple formula: Net worth equals assets minus liabilities.

The definition of net worth is summed up in a very simple formula: Net worth equals assets minus liabilities.

Let me define what that means.


Your assets are things you own that have real value. Your liabilities, on the other hand, are the opposite of your assets.  Liabilities are your financial obligations to others. When you subtract your total liabilities from your total assets, you’ve figured your net worth. It’s really that simple.

Here’s an example: If you own $200,000 in assets, but have $175,000 in debts, your net worth is $25,000. If you have $200,000 in assets and $200,000 in liabilities, your net worth is zero. And if you owe more than you own, such as $200,000 in assets and $250,000 in liabilities, your net worth is negative $50,000.

Since everyone’s financial situation is unique, there’s not a magic net worth number that you should have, but obviously the higher the better.

Net worth is an important number because it reveals your bona fide financial resources at a given point in time. Tracking your net worth keeps you focused on increasing your assets and shrinking your liabilities, which is the key to building wealth. Click here for the free Personal Financial Statement. Use this workbook to keep tabs on your net worth and make better financial decisions.

I recommend updating it on a regular basis, perhaps annually or quarterly. It’s the best way to get a complete view of your current situation and should be your financial “reality check”—something like stepping on the scale if you’re watching your weight.

As you update your PFS in the future, you’ll be able to track whether your net worth is increasing, flat, or decreasing. The goal is to slowly raise your net worth by reducing and eventually eliminating your non-essential debts. When you see your net worth increase slowly over time, pat yourself on the back and know that you’re making the right financial decisions.

How Much Net Worth Should You Have?

Once you calculate your net worth, you’ll probably wonder what it should be. We typically compare wealth across age groups. Older folks generally have more economic advantages, such as more job experience, higher pay rates, or a spouse or partner who contributes to household wealth.

But the Federal Reserve regularly publishes net worth statistics by many factors including, age, education, homeownership, and race. So, you can analyze net worth through a variety of lenses.

While age can be a useful way to think about a net worth goal, don’t get upset if you’re behind the U.S. average for your age. You can’t change your past financial life. Your job is to stay focused on what you accomplish with your money going forward.

On average, a household in the U.S. has a net worth of $692,100. That’s a pretty high number because it’s skewed by the super-rich with sky-high net worth.

A better measure is the median net worth. That’s the number found in the middle, where half the households have higher net worth and half have less. The U.S. median net worth is $97,300. Let’s break it down by several age groups.

What Should Your Net Worth Be in Your 30s?

Your thirties are an important time in your financial life. You might be getting married or starting a family and seeing expenses rise. If you can rein in costs while your income goes up, you can build significant net worth. Likewise, if you go deep into debt and live beyond your means, your net worth will stay flat or go down.

According to the Federal Reserve for 2016, the average net worth for U.S. households under the age of 35 is $76,200. And the median net worth is $11,000.

For those in the age range of 35 to 44, your average net worth is $288,700 and the median is $59,800. Again, remember that the average is skewed by a small number of very wealthy households. If you’re like most, you have student loans or a home with little equity that’s dragging down your net worth.

While you may not be able to eliminate much debt in your thirties, you can make a savings goal to build wealth. A good target is to accumulate the equivalent of your annual salary by age 30 or 35.

For example, if you earn $50,000 a year, try to have at least that much in your bank savings and retirement accounts before your 30s come to an end. Make it a habit to save money on a regular basis, even if you can only save small amounts. It will really add up and lay a rewarding foundation for your future.


What Should Your Net Worth Be in Your 40s?

As your career progresses and you build experience, you typically have the opportunity to earn more in your forties. Plus, you may own real estate that you’re paying down and that also appreciates in value. That can turbocharge your wealth accumulation.

However, this is also a decade when you may launch kids out on their own or to college. Be sure that you protect your wealth and don’t overcommit to education loans and expenses. Your children have the opportunity to apply for scholarships, take student loans, and work while they’re in school.

The Federal Reserve reported that the average net worth of households between the age of 45 and 54 is $727,500 and the median is $124,200. A good savings goal during your 40s is two times your annual income.  

See also: IRA or 529 Plan–Which Is Better for College Savings?

What Should Your Net Worth Be in Your 50s?

By the time you’re in your 50s, you’ve had three decades to make contributions to your retirement accounts and savings. Starting at age 50 you qualify to make additional “catch up” contributions to most types of retirement accounts, such as a 401(k), 403(b) and IRA.

This decade is also when many people enjoy their peak earning years. You may also have mortgages and other debt finally paid off. Therefore, this is the time to really step up your savings to four times your annual income.

The Federal Reserve shows that the average net worth for households in the age range of 55 to 64 is $1,167,400 and the median is $187,300.

What Should Your Net Worth Be in Your 60s?

Most people in their 60s are seriously considering when and how to retire or semi-retire with a second career. You may not have dependents counting on you for financial support or much debt to speak of at this point.

Your 60s is a good time to downsize your lifestyle to reduce your overall cost of living as you glide into retirement. If you qualify for Social Security retirement benefits, you must decide whether to take them early at age 62 or to wait for a higher benefit at your full retirement age of 66, 67 or beyond.

The amount you can save in your 60s depends on whether you’re still working and whether you’ve accumulated a nest egg that’s large enough to last the rest of your life. A wise savings goal is to have accumulated at least 8-10 times your salary during this decade.

The Federal Reserve data shows that the average net worth for Americans between the ages of 65 and 74 is $1,066,000 and the median is $224,100. By this time, your net worth is an indicator of the type of lifestyle you can enjoy in retirement. In fact, the average and median are nearly the same for those over age 74.


How Much Do You Need to Save for Retirement?

Now that you understand what net worth is and how it relates to your financial future, let’s get back to the anonymous caller’s question. She wants to know a good way to measure her net worth and her husband’s together.

The Federal Reserve statistics that I’ve reviewed are by household. Couples who plan to share their financial lives and eventually retire together should plan together. Start by completing the Personal Financial Statement for everything you both own and owe and compare your combined net worth to the median data for your age.

It’s no surprise that wealth is correlated with family structure, such as being married, single, or having children. Having more earners or lower living expenses allows a household to attain higher levels of net worth.

If you and your spouse or partner have a household income of $150,000, you might aim for a combined nest egg of $1.5 million.

Most couples need to accumulate about 10 times their household income to generate enough retirement income. So, if you’re married and have one breadwinner who earns $100,000, having $1 million is a wise goal to maintain your lifestyle in retirement. If you and your spouse or partner have a household income of $150,000, you might aim for a combined nest egg of $1.5 million.

However, if you plan to significantly increase your spending in retirement by traveling or owning a second home, you may need more. Likewise, if your dream is to simplify your life and downsize your lifestyle, you may need a smaller nest egg to be comfortable.

It’s reasonable to assume that you could get a 5% return on your wealth in retirement. That comes to investment earnings of $50,000 a year from $1 million or $75,000 from $1.5 million.

Remember that once you or your spouse collect Social Security benefits, you’ll have that additional income to count on. But the longer you delay taking it, the bigger your monthly retirement check from the government will be.

There are many unknowns in retirement planning but using these savings goals and basic income calculations give you a target to shoot for. You can also use a good retirement calculator to figure out if you and your spouse or partner are saving enough each month to hit your savings goal.

You’ll find a link to my favorite online retirement planning calculator in the free Personal Financial Statement. If you’re not on pace to have what you’ll need, you may need to delay your retirement age, radically decrease your cost of living, or step up your savings rate.

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5 Options for Your Retirement Account When Leaving a Job

One of the most common retirement questions I receive is what to do with a retirement account when leaving a job. Knowing your options for managing a retirement plan with an old employer is essential because most people change jobs many times throughout their careers. And millions of Americans remain out of work during the pandemic.

When you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave.

Fortunately, when you have a workplace retirement plan such as a 401(k) or 403(b), you can take your vested balance with you when you leave. It doesn't matter if you quit, get fired, or get laid off, the same rules apply. 

This post will cover five options for managing your retirement account when your employment ends. You'll learn the rules for handling a retirement plan at an old job and the best move to create a secure financial future.

Why should you use a retirement account?

Investing money using one or more retirement accounts is wise because they come with terrific tax advantages. They defer or eliminate the tax on your contributions and investment earnings, which may allow you to accumulate a bigger balance than with a taxable brokerage account.

Investing money using one or more retirement accounts is wise. If you have a retirement plan at work but aren't participating in it, now's the time to enroll!

So, if you have a retirement plan at work but aren't participating in it, now's the time to enroll! Contribute as much as you can, even if it's just a small amount. Make a goal to increase your contribution rate each year until you're putting away at least 10% to 15% of your pre-tax income.

FREE RESOURCE: Retirement Account Comparison Chart (PDF)—a handy one-page download to see the retirement account rules at a glance.

What is a retirement account rollover?

Don't make the mistake of thinking that once you leave a job with a 401(k) or a 403(b) you can't continue getting tax breaks. Doing a rollover allows you to withdraw funds from a retirement plan with an old employer and transfer them to another eligible retirement account.

When you roll over a workplace retirement account, you don't lose your contributions or investment earnings. And if you're vested, you don't lose any money that your employer may have put into your account as matching funds.

The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process.

The main rule you must follow when doing a retirement rollover is that you must complete it within 60 days once you begin the process. If you miss this deadline and are younger than age 59½, the transaction becomes an early withdrawal. That means it is subject to income tax, plus an additional 10% early withdrawal penalty.

If you're a regular Money Girl podcast listener or reader, you know that I don't recommend taking early withdrawals from retirement accounts. Paying income tax and a penalty is expensive and reduces your nest egg.

If you complete a traditional rollover within the allowable 60-day window, you maintain all the funds' tax-deferred status until you make withdrawals in the future. And with a Roth rollover, you retain the tax-free status of your funds.

What are your retirement account options when leaving a job?

Once you're no longer employed by a company that sponsors your retirement plan, there are four options for managing the account. 

1. Cash out your account

Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option. As I mentioned, taking an early withdrawal means you must pay income tax and a 10% penalty. 

Cashing out a retirement plan when you leave a job is the easiest option, but it's also the worst option.

Let's say you have a $100,000 account balance that you cash out. If your average rate for federal and state income taxes is 30%, and you have an additional 10% penalty, you lose 40%. Cracking open your $100,000 nest egg could mean only having $60,000 left, depending on how much you earn.

Note that if your retirement plan has a low balance, such as $1,000 or less, the custodian may automatically cash you out. If so, they're required to withhold 20% for taxes (although you may owe more), file Form 1099-R to document the distribution, and pay you the balance. 

2. Maintain your existing account

Most retirement plans allow you to keep money in the account after you're no longer employed if you maintain a minimum balance, such as more than $5,000. If you don't have the minimum, but you have more than the cash-out threshold, the custodian typically has the authority to deposit your money into an IRA in your name.

The downside to leaving money in an old retirement account is that you can't make additional contributions because you're not an employee. However, your funds can continue to grow there. You can manage them any way you like by selling or buying investments from a set menu of options.

The downside to leaving money in an old retirement account is that you can't make additional contributions.

Leaving money in an old retirement plan is certainly better than cashing out and paying taxes and a penalty, but it doesn't give you as much flexibility as you you would get with the next two options I'm going to talk about.

I only recommend leaving money in an old employer's retirement plan if you're happy with the investment choices and the fund and account fees are low. Just make sure that the plan doesn't charge you higher fees once you're no longer an active employee.

Another reason you might want to leave retirement money in an old employer's plan is if you're unemployed or have a job that doesn't offer a retirement account. I'll cover some special legal protections you'll get in just a moment.

3. Rollover to an Individual Retirement Arrangement (IRA)

Another option for your old workplace retirement plan is to roll it into an existing or new traditional IRA. If you have a Roth 401(k) or 403(b), you can roll it over into a Roth IRA. The deadline to complete an IRA rollover is 60 days.

Your earnings in a traditional IRA would continue to grow tax-deferred, just like in your old workplace plan. And earnings grow tax-free in a Roth IRA, like a Roth account at work. 

Here are a couple of advantages to moving a workplace plan to an IRA:

  • Getting more control. You choose the financial institution and the investments for your IRA.  
  • Having more flexibility. With an IRA, there are more ways to tap your funds before age 59½ and avoid an early withdrawal penalty than with a workplace account. That rule applies to several exceptions, including using withdrawals for medical bills, college expenses, and buying or building your first home.

Here are some downsides to rolling over a workplace plan to an IRA:

  • Having fewer legal protections. Depending on your home state, assets in an IRA may not be protected from creditors.  
  • Being ineligible for a Roth IRA. When you're a high earner, you may not be allowed to contribute to a Roth IRA. However, you can still manage the account and have tax-free investment earnings.

If you want more control over your investment choices, think you'll need to make withdrawals before retirement, are self-employed, or don't have a job with a retirement plan to roll your account into, having an IRA is a great option.

4. Rollover to a new workplace plan

If you land a new job with a retirement plan, it may allow a rollover from your old plan once you're eligible to participate. While the IRS allows rollovers into most retirement accounts, employer plans aren't required to accept incoming rollovers. So be sure to check with your new plan administrator about what's possible. 

Once you initiate a transfer from one workplace plan to another, you must complete it within 60 days to avoid taxes and a penalty.

Here are some advantages of doing a workplace-to-workplace rollover:

  • More convenience. Having all your retirement savings in one place may make it easier to manage and track.  
  • Taking early withdrawals. Retirees can begin taking penalty-free withdrawals from workplace plans as early as age 55.  
  • Avoiding Roth income limits. Unlike a Roth IRA, there are no income restrictions for participating in a Roth workplace retirement account.  
  • Getting more legal protections. Workplace retirement plans are covered by the Employee Retirement Income Security Act of 1974 (ERISA), a federal regulation. It doesn't allow creditors (except the federal government) to touch your account balance.

Some downsides to transferring money from one workplace plan to another include:

  • Having less flexibility. You can't take money out of a 401(k) or a 403(b) until you leave the company or qualify for an allowable hardship. It doesn't come with as many withdrawal exceptions compared to an IRA. 
  • Getting less control. You may have fewer investment choices or higher fees than an IRA, depending on the brokerage firm. 

5. Rollover to an account for the self-employed

If you left a job to become self-employed, having an IRA is a great option. However, there are other types of retirement accounts that you might consider, such as a solo 401(k) or a SEP-IRA, based on whether you have employees and on your business income. 

Read 4 Ways to Start a Retirement Account as a Self-Employed Freelancer or 5 Retirement Options When You're Self-Employed for more information. 

When is a Roth rollover allowed?

For a rollover to be tax-free, you must use a like account. For example, if you have a traditional 403(b), you must rollover to another traditional retirement account at work or to a traditional IRA.

If you move traditional, pre-tax funds into a post-tax, Roth account, you must pay income tax on any amount that wasn't previously taxed. That could leave you with a massive tax liability. If you want a Roth, a better move would be to open a Roth account at your new job or to start a Roth IRA (if your income doesn't make you ineligible to contribute). 

Where should you move an old retirement account?

The best place for your old retirement account depends on the flexibility and legal protections you want. Other considerations include the quality of your old plan, your income, and whether you have a new job with a retirement plan that accepts rollovers.

The best place for your old retirement account depends on the flexibility and legal protections you want.

The goal is to position your retirement money where you can keep it safe and allow it to grow using low-cost, diversified investment options. If you have questions about doing a rollover, get advice from your retirement plan custodian. They can walk you through the process to make sure you choose the best investments and don't break the rollover rules.

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How To Retire At 50: 10 Easy Steps To Consider

Can you retire at 50? On average, people usually retire at 65. But what if you want to retire 15 years earlier than that like  at 50? Is it doable? Below are 10 easy steps to take to retire at 50.  Retiring early can be challenging. Therefore, SmartAsset’s free tool can match you with  a …

The post How To Retire At 50: 10 Easy Steps To Consider appeared first on GrowthRapidly.

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The Reality of Retirement Planning

Start saving early, make a plan and determine how you’ll use your funds.

The post The Reality of Retirement Planning appeared first on Discover Bank – Banking Topics Blog.