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PERSONAL FINANCIAL PLANNING

Because of the risk and comparison of individual net worth with the aver-
age. There are several problems with this compari-
the fact that defined son. First, if you want to know how you compare
with the middle of the pack, average net worth is
very misleading. According to the 2019 Survey
benefit plans are more of Consumer Finances published by the Federal
Reserve, the average net worth of U.S. families is
approximately $747,000, but median (50th percen-
expensive, employers tile) net worth is only 16% of that amount at about
$122,000. The average is highly skewed by extremely
have been shifting away large net worths at the top of the distribution, so the
median is a far better indicator of where the middle
of the pack is.
from defined benefit time with the normal pattern being that net worth
In addition, median net worth changes over
increases with age. For example, the median net
plans toward defined worth of those ages 35–44 is $91,000, while those
55–64 have a median net worth more than double
that amount at $213,000. Median net worth
contribution plans. also varies considerably with other demographic
variables, like race, education level, home owner-
ship, and more.
Finally, returning to the issue discussed earlier,
net-worth comparisons must properly count de-
fined benefit plans. The two largest assets included
in the net worth of most families are their home
and retirement savings accounts, such as IRAs and
401(k)s. However, when it comes to net worth,
most published averages ignore pension income.
of income. However, when valuing future streams If you are lucky enough to have a defined benefit
of income, historical data suggests that despite plan, any meaningful comparison with published
its simplicity, it is reasonable to assume that each averages that include savings accumulated in
$100 per month of defined benefit plan pension defined contribution plans will require including
income is worth approximately $18,000. In other the present value of future pension income in your
words, each $100 per month of defined benefit plan net worth.
income reduces the amount of wealth needed at Note that the same is not true of Social Security
retirement by $18,000. income because those benefits are never included
As an example, examine how much an earned in published averages. All these comparability
pension income of $30,000 would add to a person’s problems should make it obvious that comparing
net worth. A defined benefit plan income of your net worth with others’ is a perilous endeavor.
$30,000 annually is $2,500 per month, which is 25
times $100. Therefore, it follows that funding such A FINANCIAL REPORT CARD
a pension benefit with a 401(k)-style defined con- Net-worth calculations are valuable when properly
tribution plan would require retirement savings of performed and used. By providing a sort of financial
at least $450,000 (25 × $18,000). Consequently, the report card, changes in net worth can help your
defined benefit plan adds $450,000 to net worth. clients see trends in their financial health and help
them better understand the process of wealth build-
NET-WORTH COMPARISONS: THE IMPORTANCE ing, which will in turn facilitate financial decisions
OF BENCHMARKING CORRECTLY that help them reach their long-term financial
Another issue that arises is comparing net worth goals. Begin helping clients by calculating a target
to inappropriate benchmarks. For instance, because net worth based on their estimated income needs
the financial press is replete with figures describ- in retirement, and then carefully monitor progress
ing average net worth, it far too readily invites the toward that target. ■

26 | Journal of Accountancy April 2022