Your Net Worth Isn't the Only Retirement Number

Sarah opened her retirement account statement and smiled. At 58, she'd finally crossed the $750,000 net worth threshold. The number felt impressive, solid, reassuring. Then her advisor asked a simple question: "What's your retirement income going to be?"

Sarah paused. She hadn't really thought about it that way. Turns out, that impressive net worth was split between her primary home equity ($400,000), her 401(k) ($250,000), and some savings. The income it would actually generate? Much less impressive than the headline number suggested.

If this sounds familiar, you're not alone. Net worth gets all the attention in retirement planning, but it's actually not the most important metric when it comes to whether you can afford to stop working. Let's break down why income, expenses, and cash flow deserve equal billing in your retirement planning conversations.

Net worth is simple math: assets minus liabilities. It's a snapshot of your financial position at a single moment. And yes, it matters. A higher net worth generally indicates stronger financial health and provides more options in retirement.

But here's where it gets tricky: not all net worth is created equal when it comes to generating retirement income.

Consider two people, both with a $1 million net worth at age 62:

• Person A: $800,000 in retirement accounts (401(k) and IRA), $150,000 in a taxable brokerage account, $50,000 emergency fund
• Person B: $600,000 in home equity, $300,000 in a 401(k), $100,000 in collectibles and vehicles

On paper, they're identical. In retirement reality? Person A has significantly more liquid, income-generating assets than Person B. Person A can more easily convert their net worth into the steady income stream retirement requires. Person B would need to sell their home, tap into a much smaller retirement account, or liquidate collections to fund their lifestyle.

This reveals the core issue: net worth measures accumulation, but retirement requires distribution. You need your assets to do something, to generate cash flow that covers your bills month after month, year after year.

Instead of fixating solely on net worth, successful retirees track several interconnected metrics that paint a more complete picture. Think of these as your retirement vital signs.

1. Projected Monthly Retirement Income

This is the big one. How much money will actually hit your account each month in retirement? Calculate this by adding up:

• Social Security benefits (create an account at SSA.gov to see your estimated benefit at different claiming ages)
• Any pension income
• Systematic withdrawals from your 401(k), IRA, and other retirement accounts
• Income from rental properties or part-time work
• Dividends and interest from investments

For that 401(k) and IRA money, a common rule of thumb is the 4% rule: withdraw 4% of your total retirement savings in year one, then adjust for inflation each year. So $500,000 in retirement accounts might generate about $20,000 annually, or roughly $1,667 per month. Add in Social Security (average benefit is about $1,907 per month in 2024, though yours may be higher or lower), and you're starting to see your real income picture.

2. Essential Monthly Expenses

What does it actually cost you to live? Not aspirationally, not what you think it should be, but what does your life genuinely require each month? Include:

• Housing costs (mortgage/rent, property taxes, insurance, HOA fees, maintenance)
• Healthcare and insurance premiums (remember, Medicare doesn't cover everything)
• Food and groceries
• Transportation and vehicle costs
• Utilities and regular bills
• Minimum debt payments

If your essential expenses exceed your guaranteed income sources (like Social Security and pensions), you're relying on investment withdrawals to cover basics. That's not necessarily bad, but it's important to know.

3. Your Income Replacement Rate

This measures how much of your pre-retirement income you'll replace in retirement. Financial planners often target 70-80% replacement, since you'll no longer be saving for retirement or paying payroll taxes. If you currently earn $100,000 and need $75,000 in retirement, that's a 75% replacement rate.

But here's the thing: this varies tremendously by individual. If you've paid off your mortgage and have no debt, you might need only 50-60% replacement. Planning expensive travel or healthcare needs? You might need 90% or more.

4. Cash Flow Cushion

Markets fluctuate. The last thing you want is to sell investments during a downturn to cover living expenses. That's why keeping 1-2 years of expenses in cash or very stable investments acts as a buffer. This isn't reflected in your net worth calculation (it's already included), but separating it mentally helps you weather market storms without panic-selling at the worst possible time.

Here's the truth that might surprise you: someone with a lower net worth but higher guaranteed income might actually have a more secure retirement than someone with a higher net worth but minimal guaranteed income streams.

Imagine two scenarios:

Scenario 1: $600,000 net worth, $3,500/month Social Security and pension combined, $30,000/year essential expenses. This person has significant guaranteed income covering most expenses, with retirement accounts as a cushion for extras and emergencies.

Scenario 2: $1.2 million net worth, $2,000/month Social Security, $65,000/year essential expenses. This person has double the net worth but must withdraw roughly $41,000 annually from investments just to cover basics. Market downturns pose a more significant threat to their lifestyle.

Neither scenario is wrong, but they represent different risk profiles and require different strategies. The higher net worth in Scenario 2 doesn't automatically mean more retirement security. Context matters.

This is why financial planners often talk about creating a "retirement income floor" of guaranteed income sources (Social Security, pensions, annuities) that cover your essential expenses. Everything above that floor can come from more variable sources like investment withdrawals.

Two people can have identical net worth and identical income projections, but vastly different after-tax spending power. This is the metric that catches many retirees off guard.

Consider where your retirement money is located:

• Traditional 401(k) and IRA: Every dollar withdrawn is taxed as ordinary income. That $500,000 balance isn't really all yours; Uncle Sam has a claim on a portion.
• Roth 401(k) and Roth IRA: Qualified withdrawals are tax-free. That $500,000 is truly yours.
• Taxable brokerage accounts: You'll pay capital gains taxes, but these are generally lower than ordinary income taxes (0%, 15%, or 20% depending on your income).
• HSA (if used for medical expenses): Tax-free withdrawals for qualified medical expenses, which you'll definitely have in retirement.

Smart retirement planning means diversifying not just your investments, but your tax treatment. Having money in different account types gives you flexibility to manage your tax bracket in retirement. Some years you might withdraw more from Roth accounts, other years from traditional accounts, depending on your other income and tax situation.

Also, don't forget about Required Minimum Distributions (RMDs). Once you hit 73, the IRS requires you to start withdrawing from traditional IRAs and 401(k)s whether you need the money or not. These forced withdrawals can push you into higher tax brackets and even cause more of your Social Security to become taxable.

Instead of obsessing over a single net worth number, think about building a comprehensive retirement dashboard with multiple indicators:

The Accumulation Side (what you have):

• Total net worth
• Liquid net worth (excluding primary home)
• Retirement account balances by tax treatment
• Emergency fund status

The Income Side (what it generates):

• Projected monthly retirement income from all sources
• Income replacement rate
• Percentage of expenses covered by guaranteed income
• Estimated after-tax income

The Expense Side (what you need):

• Current monthly expenses
• Projected retirement expenses
• Essential vs. discretionary spending breakdown
• Healthcare cost projections

The Sustainability Side (will it last):

• Withdrawal rate from retirement accounts
• Years of expenses in liquid assets
• Portfolio allocation appropriate for your timeline

When you look at all these metrics together, you get a much clearer picture of retirement readiness than net worth alone could ever provide. You might discover that you're in better shape than you thought, or you might identify specific gaps to address.

If you've been tracking only net worth, here are concrete steps to get a more complete picture:

This week: Create a simple spreadsheet listing all your income sources in retirement. Include Social Security estimates (get them from SSA.gov), any pensions, and calculate 4% of your retirement account balances. What's the monthly total?

This month: Track your actual spending for 30 days. Every dollar. Then categorize into essential and discretionary. Be honest. This is your retirement planning foundation.

This quarter: Review your asset allocation and location. Do you have money in different tax treatments? Is too much wealth tied up in your home equity? Are your investments appropriate for someone planning to retire in the next 5-10-15 years?

This year: Run detailed retirement projections that account for inflation, taxes, healthcare costs, and market variability. This is where tools like fidser. can help, or consider working with a fee-only financial planner who can provide personalized guidance.

Remember, retirement planning is not about hitting a magic net worth number. It's about creating sustainable cash flow that supports your desired lifestyle for 20, 30, or even 40+ years. That's a much more nuanced calculation than simple net worth can capture.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. fidser. is not a certified financial planning service. Every retirement situation is unique, and we strongly recommend consulting with a qualified financial advisor or certified financial planner who can provide personalized guidance based on your specific circumstances, goals, and risk tolerance before making any major financial decisions.