The exercise of calculating your net worth is an interesting one. When you start out in life your net assets are likely to be very small. If you have been able to buy real estate you may have some equity in it; the realizable equity is your asset though it may not be realizable if real estate values drop in the depressed market that has existed in some areas in recent years.
The point is that the asset is not the purchase price if it was bought with a mortgage.
While over their working lives it is likely that most people’s assets will increase as they approach retirement age, it is important to think about what income they can expect without the monthly pay check coming in, and whether any liabilities are sustainable once they have retired.
It will be a different calculation for everyone but it is a calculation that should be made a few years short of retirement if retirement provision has not been successful.
In recent years not only have real estate prices dropped but employment has become far less secure. While there is now slow growth in the USA, pre crisis employment figures are still some way away.
Assets come in many forms but the largest is likely to be real estate. A car depreciates so its value needs to be conservative. Any actual savings and investments can be taken at their value but liabilities such as a mortgage need to be looked at closely if their repayment will cause hardship on retirement when less money will be coming in. A company needs cash flow whatever the level of its assets, so does the individual particularly in retirement.
In the case of an individual reaching retirement age, it may be a case of releasing equity in real estate to create a sum to help with bills in retirement. It very much depends on the individual but if his or her major asset is real estate it may be that it needs to be sold to fund retirement.
A smaller home might suit; a typical family home may be too large anyway with the children long gone, although occasional visitors of course. Anyone who potentially faces cash problems in retirement can’t keep a large home simply for when the children come. Significant equity can be used.
Cash realized from real estate sale can buy a smaller home or be used to invest to generate a retirement income if required. Certainly entering retirement with a mortgage that will start to cause hardship is not a good idea simply to retain a home.
