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What Net Worth Do You Need to Retire?

If you’re thinking about saving for retirement, calculating your net worth can be a useful tool. It might help you evaluate your current situation, set goals and budget for retirement. “Net worth is your whole picture. It shows and tells you what you owe and what you own and how much money you really have,” says Pam Krueger, founder and CEO of Wealthramp in Tiburon, California. Read on to learn how to find your current net worth, what net worth to have in retirement and additional factors to keep in mind when planning your financial future.

[Read: Are Your Retirement Savings Ahead of the Curve?]

How to Calculate Your Net Worth

Your net worth looks at the overall value of your possessions by accounting for what you own and subtracting your obligations. “Just like a business, you’ll add up the value of all your assets, subtract your liabilities and hopefully the net result will be positive,” Krueger says. Start by summing up the value of all your assets, such as cash accounts, stocks, bonds, retirement accounts and the value of your home. “Do not include smaller items that would be difficult to convert to cash such as clothing,” Krueger says. Then turn to debts and find the total amount you owe on your mortgage, auto loans, credit cards, student loan balances and any other loans. Subtract the total debt from the total assets to find your net worth.

There are several ways to go through the calculation process. You can write it all down on your own with pen and paper or record it in a spreadsheet, or there are apps and online calculators that can help you find and track your net worth.

[READ: Can You Retire on $1 Million? Here’s How Far It Will Go.]

Determine Your Retirement Needs

If you want to set a goal for the net worth to have at retirement, the figure you use should accommodate your lifestyle and limits. “There is no one-size-fits-all number for how much money you need to have at retirement,” says Anthony Pellegrino, a fiduciary advisor and founder of Goldstone Financial Group in Oakbrook Terrace, Illinois.

To get started, take a look at how much you plan to spend in retirement. You can estimate the annual amount you will need to have available to pay all your regular bills. For instance, you might include housing, utilities, travel, food and entertainment expenses. You may then decide you want $60,000 a year during retirement to cover the cost of living. If you plan to travel extensively, spend winters in warm locations or take on other hobbies such as boating, it could impact how much you will need. You might decide having $80,000 or $100,000 a year would allow you to live your preferred lifestyle.

Net Worth at Retirement

After you calculate your current net worth, you might decide to update it periodically, such as once a year, to track your financial progress. If you pay off debt, increase your salary or add to the amount in savings, the figure may go up. As your net worth increases, you might be motivated to set further goals. For instance, if your net worth is $100,000 the first time you calculate it, you might look for ways to boost it to $125,000 and then $150,000. “Think of your net worth as a ‘snapshot’ because it captures the bottom line of where you really stand on paper,” Krueger says.

When looking at your net worth for retirement, the calculations change slightly. Your net worth evaluates your overall wealth, but your retirement income will typically come from your most liquid assets. Thus, when you look at your funds available for spending in retirement, focus on assets like cash, stocks, bonds, mutual funds and retirement accounts to see how your cash flow will be generated.

A general rule of thumb that is used for retirement planning is known as the 4% rule. “This refers to the amount of money a retiree should withdraw from a retirement account each year,” Pellegrino says. “If someone retires with $2 million in liquid assets and spends 4% each year, that comes to $80,000 per year in income.”

[Read: What Happens to Your 401(k) When You Leave Your Job.]

Spending Your Net Worth in Retirement

Once you achieve the net worth you need to retire, it’s still wise to stay budget-savvy. “While a high net worth in any asset may mean a person feels more comfortable retiring, those assets may not last the entirety of their retired life if their lifestyle and withdrawals are too high,” says Andrew Bernstein, a wealth management advisor with All Points Wealth Management, a Northwestern Mutual company, in Raleigh, North Carolina.

For instance, if your net worth is $3 million and you spend $500,000 per year, you will exhaust your funds quickly. “If you retire with a net worth of $1 million, have zero debt and only require $60,000 a year to live, you could be more financially secure than the person with three times your net worth,” Pellegrino says. “It’s not just how much you have, it’s how much you spend.”

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