The Hidden $1M Most Retirees Forget To Count

In a recent video, Kevin Lum, CFP, explained that most retirees ignore their most valuable assets when calculating their net worth. For example, most people use the standard calculation of adding up their retirement accounts, savings, and home equity and then subtracting their debt. But many forget that their Social Security payments and their pension are a valuable part of their net worth too.

Knowing that may ease the stress that many people feel when they're worried they don't have enough in their retirement accounts to stop working. After all, many employees are working towards a specific net worth goal without realizing they may have other assets that haven't been included in their calculations. 

Here is more information on how to factor Social Security and pensions into your overall net worth to figure out where you stand financially.

1 in 5 adults are anxious about retirement finances

Recent Pew Research data show that one in five adults worry they are not prepared for retirement. Additionally, the median 401(k) balance for all participants is just over $38,000, meaning half of 401(k) holders have a higher balance and half have a lower one.

For most people, that amount will not be enough to retire comfortably, but fortunately, many people have other streams of income they can use in retirement to supplement their income.

How much people need to retire comfortably

Everyone will have different retirement lifestyle goals, but Fidelity recommends having 10 times your annual salary saved by age 67. That allows you to withdraw a small amount initially while having the rest continue to compound. As Lum suggests, though, don't forget to factor in any guaranteed income streams when planning your retirement.

You may have eight times your annual income saved, for example, thinking you are not ready to retire. But when you calculate in Social Security payments or a pension, you may be closer than you think.

How to calculate a "portfolio equivalent"

Lum explains that if you convert guaranteed income to a "portfolio equivalent," you may have a higher net worth than you think. For example, he says that a pension and Social Security could be worth several hundred thousand dollars in assets. 

In the example he gave, he said a retiree with $1.6 million in traditional net worth may actually be closer to $2.8 million in real retirement wealth once they add in guaranteed income.

Why portfolio equivalents matter for retirement planning

Many people focus on meeting specific savings milestones before retiring so that they know their nest egg will last many decades. 

However, Social Security doesn't show up on a statement or a balance sheet as a large, lump sum. If you converted it to one, viewing your Social Security checks as part of a 4% draw, you would likely have more retirement savings than you realize.

Understanding your full retirement picture

Ultimately, knowing this information can help you to form a fuller picture of where you actually are in terms of your retirement readiness. That, in turn, can help relieve stress, especially if you thought you were much farther from your goal. 

Of course, there are many expenses to consider in retirement, and planning for all of them, including health care costs, will help you be as prepared as possible.

There will always be some element of stress or fear of the unknown as you transition from a salaried income to a fixed income. However, having a better understanding of your total net worth numbers can help you feel more organized and prepared for your golden years.

Avoid wild spending, even if you have a larger nest egg

Lum cautions people that even if they have a larger nest egg than expected once they factor in guaranteed income, it shouldn't give them the freedom to spend wildly. 

Rather, converting guaranteed income to a portfolio equivalent for the purpose of deciding whether or not you're ready for retirement is more about understanding your full retirement picture. The more information you have, the better you'll be able to plan for your future.

Where to get help with your retirement plan

If you need help determining whether or not you're prepared for retirement, consult with a financial advisor. 

They can listen to your goals, plans, and hopes for your retirement lifestyle and let you know whether that's possible with the amount you have currently saved.

Bottom line

Many retirees are worried that they'll never get the retirement life they've always dreamed of. However, many people have more assets in their retirement plan than they think, especially if they have guaranteed income, such as a pension or Social Security. 

Factoring in these amounts can give people a fuller picture of their retirement preparedness, which can ease some financial stress.