When I was younger, I used net worth to measure my wealth accumulation. However, I as got older, I realized that net worth alone didn't provide enough perspective on readiness for retirement. For example, consider the three situations in the table below.
|Net Worth Comparison|
|High Debt||$5 million|
|Illiquid Assets||$3 million (houses, land, yacht, etc.)||$0||$3 million|
|80% Liquid Assets||$3 million ($600,000 in illiquid assets and the rest in stocks, bonds, and cash)||$0||$3 million|
While all three have $3 million in net worth, the readiness for retirement situation is very different. In the high debt example, the person has a minimum debt payments of $140,000/year , assuming a 7% interest rate, before other living expenses. In the illiquid asset/no debt example, the assets likely have fixed maintenance costs and do not generate income. Assuming 2% maintenance costs, the person would need $60,000 per year. In the 80% liquid assets/no debt example, the investments are generating income, and the assets require less annual maintenance money (e.g. $12,000/year at 2%).
I came to this understanding back in 2006 and stopped using net worth as a measure of our wealth. As a replacement measure, I started using Savings Ratios and Debt Ratios, as explained in How Much is Needed to Be Wealthy - THE NUMBER .
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This is not financial, saving or retirement advice. Please consult a professional advisor.
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