Many of my new clients want to know if they have enough money to retire.
Once I explain that, at Keen Wealth, we don’t believe folks should be focused on hitting some magic number, the follow-up question is almost always, “OK … But how do my assets compare with other people my age?”
Thanks to the Board of Governors of the Federal Reserve System, that’s a question I can answer. But while the latest data on net worth does provide some insights on how Americans are – and aren’t – preparing for retirement, there are many other important factors to consider when building out your long-term financial plan.
Defining Net Worth
Net worth weighs your assets against your liabilities. You can make a rough estimate by putting together a simple balance sheet. On one side, list all your assets and their approximate value. Include retirement accounts, your bank accounts, bonds, CDs, health savings accounts, the value of your life insurance policies, real estate, vehicles, and other valuables like art and jewelry. Then, on the other side of the sheet, list your liabilities, including credit card balances, loans due, unpaid medical bills, and mortgages.
This is a good exercise to do at least once per year, preferably with the help of your fiduciary advisor. Balance sheets can be eye opening: many folks don't realize how things like their home, second vehicles, or the debt they used to upgrade their rec room actually straddle a fine line between assets and liabilities, and how that affects their total net worth. You can also refer to your balance sheet when you're thinking about your next big-ticket purchase or when you're updating your estate planning documents.
Breaking Down the Brackets
Here's the latest data (2016-2019) from the Federal Reserve on changes in median and mean net worth by age. Note the fine print that says these numbers represent thousands of dollars.
The good news is that, across the board, net worth is trending upwards for most families. That's not too surprising considering that this data includes the tail end of the longest bull market in history, and also doesn't include data from the 2020 pandemic. You might argue that since we don't have 2020 numbers yet, this picture is a bit incomplete. But what I take away from this report is that, absent an unprecedented shutdown of global business that also rattled the financial markets, and despite all the political tumult we've had since 2016, families, by and large, were building their wealth. And now that we're exiting lockdowns and the economy continues to rebound, we could reasonably expect those positive trends to continue.
Two other numbers stand out to me:
First, your kids and grandkids under 35 saw a 6% drop in average net worth. Even before COVID-19, young folks were dealing with a very different labor market than baby boomers knew. High student debt, the rise of the gig economy, and shrinking corporate benefits packages continue to be challenges. Many millennials delay buying homes, marrying, and following a financial plan while they're trying to find their professional footing, which only slows their wealth-building more. It will be interesting to see if the disrupted corporate landscape and decentralized job opportunities help or hurt younger workers going forward.
The other number I want to point out is the drop in both mean and median net worth for folks over 75. In a sense, this isn't really surprising. A retired senior who is living off their nest egg and not earning a paycheck will, naturally, deplete their assets over time. For most folks, that's part of the plan!
But today's 75-year-olds are also living longer, more active lives than any generation of seniors of history. Double-digit declines in your net worth over a short span of years will add up once you hit your 80s, 90s, and -- hopefully -- 100s. Planning for that longer life is going to change the retirement calculus for all of us going forward, whether that means delaying retirement, working part time once you do retire, or committing more of your resources to long-term financial planning during your prime earning years.
Budgeting for Your Blueprint
Once we start thinking about your golden years, we run up against the limits of focusing on net worth. A million-dollar balance sheet isn't necessarily going to take care of you as you age if the bulk of your assets are tied up in things that you own.
Which leads me to one more important fact from that Federal Reserve data: the mean retirement savings in U.S. households is $255,125 and the median is only $65,000. The reason for that disparity is that high-net-worth individuals generally have much more saved for retirement than folks in the middle and lower brackets.
Now remember, these figures only represent savings, not investment accounts. But the Fed also found that while 55% of non-retirees have a 401(k) or 403(b), 25% have no retirement savings at all. Those are some very worrying percentages. I certainly hope these folks aren't under the misconception that Social Security and "free" health insurance from Medicare will be enough to cover their needs.
Moreover, when I think about folks sitting in the middle of the pack in terms of retirement savings, I hope they have a robust diversified portfolio they can rely on as well. Sure, $200-$300,000 is a lot of money, and for some folks that range might cover a happy and secure retirement. But what happens if you have a bad fall at 85 and need your savings to pay for skilled nursing care and a move closer to family who can help take care of you? Or, what if you start to feel a little bored and disconnected from your community and want to establish your own charitable organization to help you get off the couch and make a difference?
These kinds of life transitions, combined with your personal passions and your family's needs, are what truly help to determine how much money you’ll need for retirement. So instead of worrying about how your assets stack up to your neighbor’s, start thinking about what your personal retirement blueprint looks like. My team at Keen Wealth would be happy to help you lay out the foundation for realizing that vision.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 25 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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