The value of your 401(k) or other retirement accounts is one of the biggest components of your net worth. And net worth is one of the most important benchmarks for appraising your financial health. That means increasing the value of your retirement accounts is one of the most effective ways of improving your financial picture and helping you to achieve a secure retirement and reach other financial goals. A qualified financial advisor can help you build up your net worth.
Retirement Accounts and Net Worth
Retirement accounts including 401(k)s are the second-largest contributor to household net worth, according to a 2019 Census Bureau analysis. That Net Worth of Households report found that 401(k) and other retirement accounts accounted for approximately 29% of the typical household’s assets. Only homeowner’s equity contributed more, at about 34% of total assets.
Retirement accounts are also common. Slightly more than half of all households had a retirement account as an asset. Bank accounts were the most commonly held asset, owned by more than 90%. Vehicles and homeowner’s equity also showed up more frequently non household balance sheets than retirement accounts.
Understanding Net Worth
Calculating net worth is simple. The formula is:
Assets – Liabilities = Net Worth
Assets are things that have value. They come in many types and sizes. Along with retirement accounts, bank accounts, vehicles and homes, assets may consist of business assets and rental property as well as stocks, bonds and mutual funds held in non-retirement accounts. Depending on who’s counting, asset totals may not include items of value such as household furnishings. Equities held by pension plans, unlike those in 401(k)s, may also be left out.
And take care to distinguish between income and assets. That is, your expected salary for the coming year isn’t an asset, although it’s certainly important for cash flow.
Liabilities also may be varied. Typical liabilities include mortgages, auto loans, credit card balances, personal loans and student loans. If you borrow from your 401(k), that’s a liability as well. Essentially, a liability is anything you owe. To total liabilities, add up outstanding loan balances, not loan payments. Payments, like earnings, help forecast cash flow, but only balances count for figuring net worth.
To do the calculation, simply add up all the estimated value of your assets and subtract your liabilities. The result is your net worth. If you use personal financial software, it may do all the calculating for you. This allows you to see your net worth at a glance and also track how it’s changing over time.
Note that it’s possible to have negative net worth if your liabilities come to more than your assets. While this is not a desirable sign, you may temporarily have negative net worth if, for instance, you’ve recently purchased a home and taken on a large amount of debt.
Uses for Net Worth
Economists study net worth because it indicates how well households may fare when times get tough. With enough net worth, people can better cope with unemployment, illness or other unexpected and sizable cost or loss of income. Net worth also enables comparison, either to your former self or to other individuals and families. The 2019 Survey of Consumer Finances, a report issued periodically by the Federal Reserve, pegged $121,700 as the net worth of the median family. That means if your net worth is $121,700, you are right in the middle, with higher net worth than half of families and lower net worth than half of families.
Net worth tends to vary by age, so a finer-grained look might compare people at about your stage of life. For instance, the Fed survey found people age 65-74 had the highest median net worth, about $266,400, while those aged 35-44 were worth only about $91,300.
The direction of changes in your net worth measures your financial strategy’s effectiveness and may be more important than the sheer size of your net worth. Up, of course, is usually better, and people’s net worth typically improves over time.
For 2019, the Fed survey reported median family net worth was up 18%. This may not all be due to wise individual financial choices, however. Net worth naturally fluctuates with business cycles and changes in the valuation of various asset classes, such as real estate and stocks.
Increasing Net Worth
You can increase net worth by increasing assets, reducing liabilities or both. Not all assets or liabilities are equal, however. Assets that typically increase in value, such as contributions to retirement accounts, probably have more positive effect on your net worth than assets that depreciate, such as vehicles. Similarly, liabilities like home mortgages that let you acquire appreciating assets tend to boost net worth more than loans to buy boats, which lose value over time.
Net worth is one of the most informative and helpful figures for understanding your financial position, and 401(k) plans and other retirement accounts represent one of the biggest influencers on net worth. Contributing to retirement plans, especially when an employer is matching contributions, can effectively improve your net worth and help you achieve your financial goals.
Tips on Building Wealth
- A financial advisor can help you craft a plan to boost your net worth. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s free investment calculator to get a good estimate of how to grow your money over time.
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