In retirement, net worth shows the sum of a lifetime’s savings, debts and investments. This metric is often more insightful than income because it reveals your financial stability and shows whether you are poor, middle class or rich.
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This allows pensioners to assess their financial situation on a spectrum from “poor” to “rich”.
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Definition of economic classes in retirement
In retirement, your economic class can be broadly divided into four different groups, each defined by their net worth and financial ability, ranging from retirees with limited means to the wealthy. According to Moneywise, these are the net worth categories of the poor, the middle class (and upper middle class), and the wealthy:
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Poor pensioners: Poor retirees are in the bottom 20th percentile and may have a net worth of about $10,000. They often own no property, so many of them rely primarily on Social Security or minimal pensions.
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Middle class pensioners: This group represents the 50th percentile and has a median net worth of about $281,000. They typically have home equity, retirement savings, and a 401(k) plan.
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Upper middle class pensioners: These retirees have net worths between $201,800 and $608,900. They have diversified their assets and enjoy a comfortable cushion for retirement.
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Rich pensioners: This 90th percentile group, whose net worth starts at $1.9 million, has significantly more financial freedom and can afford luxuries and estate planning.
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What is the average net worth at retirement?
According to recent Federal Reserve data, the average net worth of people ages 65 to 74 was $1,794,600, more than four times the median net worth of $409,900. This significant difference is due to the fact that the super-rich skew the average significantly upward.
Although $409,900 seems like a decent nest egg, it won’t provide enough income for most Americans in retirement. For example, if you invest that amount at a 5% interest rate, it will only yield $20,495 per year, as previously reported by GOBankingRates.
Where you live and your lifestyle also play a big role in how far your money will go. Nearly $20,500 a year isn’t enough in high-cost-of-living states like California or New York. Social Security can help, but it still may not be enough.
Many financial advisors say you need at least 80% of your pre-retirement income to live comfortably. According to the Fed’s report, the average American needs at least $56,240, based on the U.S. median household income of $70,300.
Pensioners from the poor and lower middle classes are struggling the most
According to a study by USC’s Schaeffer Center for Health Policy & Economics and Columbia University’s Mailman School of Public Health, lower-middle-class Americans approaching retirement age are worse off than they were two decades ago, often struggling to afford health care and housing. On the other hand, upper-middle-class Americans have experienced longer life expectancies and greater prosperity.
Many seniors are often burdened with debt—particularly medical bills, credit card debt, and mortgage debt. This can even lead to negative net worth in retirement, meaning total debts are greater than total assets.
Based on data from the Consumer Financial Protection Bureau, the National Council on Aging reported that more than one in five older adults with incomes under $25,000 have medical debt. In 2019, the Center for Retirement Research also found that 85% of American households ages 65 and older had credit card debt—and more than one in four older adult households were still paying off a mortgage after age 65.
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Determining your economic class in retirement based on net worth is more than just a measure of financial success; it’s a guide for future planning and lifestyle choices. Whether you’re climbing the economic ladder or pursuing a stable retirement, understanding your finances is the first step.
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This article originally appeared on GOBankingRates.com: Net Worth for Retirees: How to Tell if You’re Poor, Middle Class or Rich
