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Many people worry about running out of money after retirement, but they may be sitting on millions of dollars – or even millions – more than they realize.
“It’s possible that you’ve been miscalculating your net worth your entire life, and that mistake could cause you to spend less than you can, cause you to worry more than you need to, and make worse decisions in retirement,” certified financial planner Kevin Lum recently said. Youtube video.
That’s why many Americans are ignoring a major source of retirement wealth that is hidden in plain sight.
Why do many Americans underestimate their retirement net worth?
Traditionally, net worth is calculated by adding up retirement accounts, brokerage savings and home equity, then subtracting debt. This approach works well during the accumulation years, but it falls short once one enters retirement.
“That calculation is incomplete, because for someone in retirement, it completely ignores your more valuable assets,” Lum said. “It ignores your Social Security benefits and, if you have one, your pension.”
These forms of guaranteed income may not appear on the balance sheet, but they have real financial value.
One way to estimate that value is to convert income into “portfolio equivalent” – the amount of assets a person would need to invest to generate the same cash flow using a standard withdrawal rate, such as 4%.
Viewed through that lens, the income stream that retirees forget about can rival — or even exceed — the value of their investment portfolio.
How Social Security and pensions could be worth hundreds of thousands or even more
Lum offers the example of a retiree with a traditional net worth of $1.6 million. Once Social Security and pension income are converted into portfolio value, the retiree’s “real” net worth may be closer to $2.8 million.
In that scenario, Social Security alone could be worth several million dollars in invested assets. Several lakhs more can be added to a pension. This difference can significantly change how secure a retiree actually is and how much financial flexibility they have.
“The problem is that it doesn’t show up on a statement, it doesn’t show up on a balance sheet, and a lot of people don’t count it,” Lum said. “When you add up the equivalent portfolio needed to make the same amount of guaranteed income, you may be in a much better position.”
For retirees who feel behind or worried about their finances, recognizing this income-backed value can be a great comfort.
How guaranteed income can change retirement spending and investment decisions
Understanding this whole picture can impact how retirees allocate assets, how confidently they spend money and how aggressively they invest for the long term.
“If your Social Security amount is covering most of your fixed expenses, you can be more aggressive with your investment accounts and be able to build some larger, long-term wealth,” Lum said.
“By having the whole picture, you’ll have a better understanding of what you’re doing,” he adds. “Many people … don’t take into account the long-term value of their pension or their Social Security, which could be worth … more than a million dollars of wealth that they never even thought about.”
Lum emphasizes that this realization is not about spending recklessly or ignoring market realities.
“The answer is not to go and blow your money away and say, ‘I’m rich, I just found out I have another million dollars,'” he said. “But the answer is…making decisions with the whole picture, not just a partial picture, because when you see your real net worth, it starts to influence real-life decisions.”
