I do not use my entire net worth to estimate retirement readiness. This reason is because some parts of net worth, such as a house and personal belongings, can't easily be used to fund a retirement. To illustrate, consider the following two hypothetical people and whether they could retire immediately.
Ima Saver decided to rent her home and live a modest life. Her biggest asset is her savings. Lot O'Stuff decided to spend most of his income on tangible assets - a nice home, a vacation home, nice cars and nice furnishings. Both have the same net worth of $1,050,000.
|Category||Ima Saver||Lot O'Stuff|
|Spendable Net Worth||$1,000,000|
Suppose both get an offer to retire in the next year. While both have the same net worth, spendable net worth is the best indication of ability to retire. Ima is in a position to consider the offer. For Lot, his options are to continue working or to sell off his assets to fund retirement, which is not likely.
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This is not financial or retirement advice. Please consult a professional advisor.
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