People are always comparing themselves to other people. It’s human nature. Retirement planning is no exception.
One of the value-added services that I provide to my investment management and retirement income planning clients is the ability to view an up-to-date net worth statement 24/7 from anywhere in the world at a moment’s notice. This is possible because of account aggregation technology that automatically updates values of clients’ financial institution accounts daily. These include, but aren’t limited to, bank, investment, annuity, life insurance, mortgage, auto loan, and credit card accounts.
From time to time when I’m reviewing a net worth statement with a client, he/she will ask me how his/her net worth stacks up against other people who are about the same age. My reply is always the same. I start out by telling my client that everyone’s situation is different. Each of us has a unique personality, with different values, needs, family history, health situation, comfort zones, etc. This in turn directly influences how we approach our finances, including retirement planning.
Even if I have two clients whose net worth happens to be identical at a particular moment in time, the planning that I do for them will never be the same due to the differences mentioned above as well as other reasons. For one thing, two people with a net worth of $3 million are likely to have totally different financial situations.
Keeping in mind that net worth equals total assets minus total liabilities, it’s possible that one person may have assets of $3 million and no liabilities while another individual has assets totaling $5 million and liabilities totaling $2 million. In addition, the types of assets and liabilities may be quite different. The first person may own a residence that’s valued at $1.5 million; have $500,000 of annuities, and $1 million in a 401(k) plan. The second individual may own a home and rental properties worth $4 million with mortgages totaling $2 million, a business worth $750,000, and life insurance with cash value of $250,000.
Due to the fact that the components of net worth can be quite different from one person to another, it doesn’t matter how your net worth compares to someone else. When it comes to retirement planning, what’s most important is how you plan on converting components of your net worth to provide you with sufficient sustainable after-tax, inflation-adjusted lifetime income, when combined with other sources of income, to meet your projected planned and unplanned expenses for the duration of your retirement years without depleting your net worth.
In summary, it’s not important how your net worth compares to someone else. What’s significant is how you will use your net worth to furnish you with the income that’s not provided from other sources to enable you to support your desired lifestyle and pay for unplanned expenses throughout your retirement. You see, it’s not about other people. It’s all about you.