The number may surprise you.
Your net worth is something you may not think about every day. Rather, you may be more focused on the balance in your checking account so you can pay your near-term bills.
You don’t necessarily have to stress about your net worth on a daily basis. But your goal should be to grow your net worth over time so that once retirement arrives, you’ve got plenty of money to spend on essential expenses and the fun things you’ve always wanted to do.
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You may be curious as to what the typical U.S. household’s net worth is. To that end, the Federal Reserve has some answers. But it’s important to know that no matter where your net worth stands today, the right strategy could boost it significantly by the time retirement comes around.
What the numbers say
The Federal Reserve releases a Survey of Consumer Finances every few years that provides a detailed view of Americans’ finances. According to its most recent one, the average U.S. household’s net worth was $1,063,700 as of 2022. But that doesn’t tell the whole story.
That same set of data also reveals that the median U.S. household’s net worth that year was $192,900. And when you have a median that’s substantially smaller than an average in a given data set, it tells us that the median is generally a more representative figure.
In other words, what’s likely happening here is that a small percentage of households with a higher net worth are driving the average up. So if your personal net worth is closer to $192,900, don’t assume that you’re behind or in poor shape. You may be right on par with the typical American.
How to grow your net worth for retirement
Regardless of what your net worth looks like today, you may be eager to grow it in time for retirement. And to that end, it pays to do a few key things:
Let’s break each action item down. Living below your means simply means not spending your entire paycheck every month. A good way to help ensure that you’re living below your means is to keep your larger expenses, like housing, as low as reasonably possible. If your house is your biggest ongoing expense, committing to a $2,000 mortgage payment instead of $4,000 gives you that much more breathing room.
Next, aim to budget your money to allow for plenty of it to go toward long-term savings. This doesn’t necessarily mean that you need to plan out your spending to the penny. But what you should do is aim to save 15% to 20% of your paycheck each month for retirement, and put that process on autopilot by signing up for your employer’s 401(k) or automating contributions to an IRA.
It pays to save for retirement in one of these plans specifically because you’ll get a tax break on either your contributions (with a traditional savings plan) or on your withdrawals (with a Roth savings plan). Plus, you won’t pay taxes on capital gains year after year in a traditional IRA or 401(k). And with a Roth, you’ll never face taxes on gains at all.
Allocating money toward retirement savings isn’t enough, though. You’ll also need to invest that money if you want to see it grow.
If you’re not sure how to invest your retirement plan, and you’re not super comfortable creating a portfolio of individual stocks, you can always fall back on a broad market index fund, like an S&P 500 index fund or total stock market index fund. These options give you instant diversification, which is an essential component of investing.
In fact, if you were to invest $500 a month in one of these index funds over 40 years, you could end up with over $1.5 million, assuming an 8% yearly return in your portfolio. That’s a notch below the stock market’s average annual return.
Don’t be intimated by the average household’s net worth
You may find it interesting to see what the typical American household’s net worth looks like. But don’t let that average number throw you.
At the same time, don’t assume that it’s not attainable. With the right approach to spending, saving, and investing, you can set yourself up with a lot of money to retire on.