When you sit down to calculate your net worth, the question often pops up: Should retirement accounts like 401(k)s and IRAs be included? The answer is yes, but with some important details to keep in mind. Retirement accounts are a big piece of your financial puzzle, so understanding how they fit into your net worth calculation is key to getting an accurate picture of your financial health.
What Is Net Worth, Anyway?
Net worth is simply what you own minus what you owe. Your assets include cash, investments, property, and yes, retirement accounts. Your liabilities cover things like credit card debt, student loans, and mortgages.
Formula:
Assets - Liabilities = Net Worth
Your retirement accounts fall under assets because they represent money you've saved and invested over time, even if you can't access them freely right now.
Why You Should Include Retirement Accounts in Your Net Worth
Retirement Accounts Are Real Assets
Think of your retirement accounts as locked treasure chests. You can’t open them without some rules and possible penalties before retirement age, but the value inside is yours. Including these accounts in your net worth shows the full scope of your financial resources—not just what’s spendable today.
Long-Term Growth Matters
Retirement accounts often hold a significant chunk of your wealth, especially if you’ve been diligent about saving. Ignoring them means understating your real financial strength and progress toward your goals.
Planning for Retirement
Tracking your net worth with retirement accounts included helps you see if you’re on the right path. If these accounts grow steadily, you’re building a solid foundation for the future.
Photo by Towfiqu barbhuiya
How to Value Different Retirement Accounts in Your Net Worth
Defined Contribution Plans (401(k), IRA)
For plans like 401(k)s and IRAs, it's straightforward. You use the current balance shown on your account statements. This balance reflects your contributions plus investment growth (or losses). It’s a solid number that updates regularly.
Defined Benefit Plans (Pensions)
Pensions are trickier because they promise a stream of income, not a lump sum balance. To count pensions in net worth, estimate their present value—essentially, how much that future income is worth today.
A simple way to approach this for net worth purposes:
- Each $100 per month of pension income could be valued at around $18,000 in net worth terms.
- Multiply the expected monthly income by this factor to get an approximate value.
Not everyone has pensions these days, but if you do, factoring them in makes your net worth count more complete.
Liquid Net Worth Versus Total Net Worth
Not all assets are equal when it comes to access. Liquid net worth means the cash or near-cash assets you can get your hands on quickly—think checking accounts or stocks that can be sold today.
Retirement accounts are usually not liquid because of withdrawal penalties and taxation rules if accessed early. But they still belong to your total net worth because they represent wealth you'll use eventually.
Tracking both liquid and total net worth is smart. Liquid net worth tells you how prepared you are for emergencies, while total net worth gives the full picture of your financial standing.
Taxes and Penalties: What to Consider
Including retirement accounts means you should also remember taxes and penalties. In the U.S., withdrawing early from tax-deferred accounts like a 401(k) often triggers a 10% penalty plus income tax on the amount withdrawn.
Because of this, the net worth value you report may be a bit optimistic, since you might not receive 100% of that balance in cash. Still, the account balance is reported before penalties or taxes and serves as a good estimate of your accumulated resources.
Why Tracking Your Retirement Accounts in Net Worth Helps
- Motivation: Seeing your retirement savings grow gives motivation to keep up good saving habits.
- Planning: It shows if you need to adjust savings rates or investment strategies.
- Comparison: Helps compare your progress with others or financial goals.
- Peace of Mind: Knowing your total net worth offers confidence in your financial future.
Common Mistakes When Counting Retirement Accounts
- Forgetting to include employer-matching contributions or stock ownership in your 401(k).
- Excluding pensions or calculating their value inaccurately.
- Confusing liquid value with total value. Always remember retirement accounts are often less accessible.
- Ignoring tax implications that affect the actual cash you’ll receive later.
Wrapping It Up
Retirement accounts are a vital part of your net worth. They represent years of saving and can be your biggest asset. Including them gives a more accurate view of where you stand financially and helps you plan smarter.
Keep an eye on the different types of accounts and understand their value—not just the numbers but how accessible they are, and what taxes or penalties might apply. This balanced view gives you the clarity you need to make solid decisions about your money today and tomorrow.