When it comes to evaluating your financial health and comparing it to others, one of the key metrics to consider is your net worth. Net worth is essentially the difference between your assets (what you own) and your liabilities (what you owe). It provides a snapshot of your current financial position and can be a crucial indicator of your financial well-being. In this comprehensive article, we will delve deep into the concept of net worth, particularly focusing on Americans’ average net worth by age.
Understanding the Difference: Average vs. Median Net Worth
Before we dive into specific age groups and their average net worth, it’s essential to grasp the distinction between average and median net worth. These two metrics provide different perspectives when assessing financial data.
Average Net Worth: This figure is calculated by adding up the net worth of all individuals in a given population and then dividing that sum by the number of people in the group. While it provides a sense of the collective wealth, it can be heavily influenced by extreme outliers. For instance, if the net worth of multi-billionaires like Elon Musk is factored into the calculation, it can substantially inflate the result.
Median Net Worth: In contrast, the median net worth represents the middle point of a data range when all individual net worths are ranked from smallest to largest. It is less sensitive to outliers and offers a more accurate reflection of what’s typical within a group. In cases of an even number of individuals, the median is the average of the two center values.
Both average and median net worth figures have their merits and are used for different purposes. Average net worth is more insightful when dealing with normally distributed data, while median net worth is preferable when working with skewed data or when outliers can significantly impact the results.
Calculating Average Net Worth
To calculate the average net worth, you simply add up the net worth of each individual in a particular population and then divide that sum by the total number of individuals. Let’s illustrate this with a practical example:
Suppose we have three individuals with net worths of $50,000, $75,000, and $100,000, respectively. The average net worth for this population would be calculated as follows:
($50,000 + $75,000 + $100,000) / 3 = $75,000
This indicates that each member of this group has a net worth of $70,000 on average.
Calculating Median Net Worth
Calculating the median net worth involves arranging all individual net worths in a population from smallest to largest and identifying the middle value.The median is the average of the two center values when there are an even number of people. Let’s go back to the earlier illustration:
Using the same three individuals with net worths of $50,000, $75,000, and $100,000, the median net worth would also be $75,000 because it lies in the middle when arranged from smallest to largest.
However, it’s important to note that in some cases, the median and average net worth can differ significantly, especially when dealing with larger populations or skewed data. For example, if a group of five people has net worths of $500,000, $400,000, $300,000, $200,000, and $100,000, the median net worth would be $300,000, which is quite different from the average net worth.
When to Use Median vs. Average Net Worth
The choice between median and average net worth depends on your specific financial analysis needs. If you are working with data that follows a normal distribution and you want a single value to represent a larger dataset, average net worth is the preferred metric. On the other hand, if your data is skewed, contains outliers, or you want a more accurate representation of typical net worth, then median net worth is the better choice.
Average Net Worth By Age
Now that we have a solid understanding of how average and median net worth are calculated and when to use each metric, let’s explore Americans’ average net worth by age. Net worth tends to change with age due to various factors such as income, expenses, investments, and inheritance. To provide you with the most up-to-date information, we will refer to the Federal Reserve’s Survey of Consumer Finances from 2019.
Under 35: $76,300
For individuals under the age of 35, the average net worth is approximately $76,300. This age group typically includes young professionals who are just starting their careers and building their financial foundations. While this figure may seem relatively modest compared to older age groups, it’s essential to consider the impact of student loans, lower income levels, and the time it takes to accumulate assets.
In the 35-44 age bracket, the average net worth rises significantly to approximately $436,200. This increase can be attributed to factors such as increased earning potential, homeownership, and a longer time horizon for investments. Many individuals in this age group have also had the opportunity to pay down student loans and establish themselves in their careers.
The 45-54 age group sees a substantial jump in average net worth, reaching approximately $833,200. At this stage, individuals often experience peak earning years, have paid off significant debts, and may have valuable assets such as real estate and retirement savings.
For those aged 55-64, the average net worth continues to climb, reaching approximately $1,175,900. This group is likely nearing retirement or already in retirement, benefiting from years of savings, investments, and potentially downsizing their homes.
The 65-74 age group maintains a strong average net worth of approximately $1,217,700. Individuals in this category are likely in retirement and relying on their accumulated assets, including retirement accounts and possibly pension plans.
75 and over: $977,600
Even in the 75 and over category, the average net worth remains significant at approximately $977,600. This group may continue to draw from their retirement savings while also considering estate planning and inheritance for their heirs.
It’s important to note that these average net worth figures are based on data from the Federal Reserve’s Survey of Consumer Finances and represent a broad overview. Individual circumstances can vary widely, and factors such as geographic location, career choices, and financial decisions play a significant role in determining one’s net worth.
Calculating Your Own Net Worth
Now that we’ve explored average net worth by age, you may be curious about your own net worth. Calculating your net worth is a straightforward process that can provide valuable insights into your financial situation. To calculate your net worth, follow these steps:
- List Your Assets: Make a comprehensive list of all your assets, which may include cash in bank accounts, investments, real estate, and personal items like cars or jewelry.
- List Your Liabilities: Identify all your liabilities, including debts such as student loans, credit card balances, mortgages, and personal loans.
- Calculate Net Worth: Use the following formula to calculate your net worth:Net Worth = Total Assets – Total LiabilitiesFor example, if your total assets amount to $300,000, and your total liabilities come to $250,000, your net worth is $50,000.
Regularly evaluating and tracking your net worth can help you monitor your financial health over time, set financial goals, and make informed decisions about saving and investing.
In summary, both average and median net worth are valuable benchmarks for comparing your financial status with others. While average net worth provides a snapshot of collective wealth, median net worth is less influenced by outliers and offers a better reflection of typical financial status. Understanding these metrics can empower you to make informed financial decisions at any stage of your life.
Financial Planning Tips
While understanding your net worth is essential, effective financial planning goes beyond this metric. Asset allocation and asset location are crucial components of a comprehensive financial strategy. Asset location, in particular, involves strategically placing different assets in tax-deferred, tax-free, and taxable accounts to optimize tax efficiency.
For example, it may be advantageous to keep assets that regularly incur taxes in tax-deferred accounts like 401(k)s and traditional IRAs, while placing more tax-efficient assets in brokerage accounts that are subject to capital gains taxes.
Additionally, consider seeking the guidance of a financial advisor who specializes in financial planning. These professionals can help you create a comprehensive roadmap for reaching your financial goals, taking into account factors such as retirement planning, investment strategies, and estate planning.
Finding the Right Financial Advisor
If you’re ready to take control of your financial future and work with a trusted advisor, the process doesn’t have to be daunting. SmartAsset offers a free tool that can match you with up to three vetted financial advisors in your area. You can even have a free introductory call with your advisor matches to determine which one aligns best with your financial goals.