I think you would do it differently depending on why you are doing the calculation. E.g., net worth = assets - liabilities, so that includes the equity in my house. OTOH, since I don't plan to ever move, when I am planning my retirement, I ignore that equity. Of course, it's still there as a backstop in case everything goes into the shitter when I'm 80, but since that's not my desired plan, I exclude it.
For me, the most useful approach has been something I read elsewhere here (and I wish I could recall who to give credit to): I plan by "buckets," with each bucket covering a specific time frame.
E.g., our current plans are to quit at 58, when the kids are out of the house. So from say 58-66, I will need $X (normal expenses) + Y (college not covered by savings) + Z (we plan to travel a lot in the first few years). For that period, I will need to rely on my investments, since we will not have pension or SS. So to figure out how much I will need to have to cover that period, I will need (X+Y+Z) x 8 years. So assume that normal expenses are $40K and college cash flow and extra travel are $10K each, that means I will need $60K x 8 = $480K. Discount that to present value (because I don't need $480K *now*, I need enough $ now to become $480K when I hit 58), so maybe I need $400K invested now to cover that 8 years.
Then from 66-70, college will be over, so my expenses go down to X + Z (because we are still traveling). So now my annual costs are $40K + $10K travel, so I need $50K x 4 years = $200K, let's say present value is $120K [side note: since this period starts 8 years into the future, I need *less* now to get to my $200K target, because my little 'stache will have 8 more years to grow into that $200K figure].
Now from 70-80, I am going to assume that the travel will cut back some, so say $5K/yr. But I am going to plan for more medical costs as things start going wrong, so say $10K/yr. So now my annual need is $55K. But now I have Social Security to cover part of those costs! So assuming that is $30K, that means I need to cover only $25K/yr from my investments. So $25K x 10 years = $250K. Discount to present value [again, even greater discount because this is even farther into the future], and I need maybe $100K now.
Etc. etc. etc. Basically, start from your planned RE date, and go all the way out until 95 or 100 or whatever makes sense to you, dividing the time up into different pots depending on what you foresee for your expenses and when you are eligible for different sources of income. And then you start filling those pots from the oldest to the youngest -- take car of "old" you first (e.g., 80-100), and then move backwards for the younger and younger periods. And when the math tells you that your "pots" are filled all the way back to the current date, then poof! you are FIRE'd!
I found that this approach gave me a much better sense of where I am on my path to RE (FWIW, when I did this, it told me I needed significantly less money saved than I had calculated using the standard 4% rule) -- for me, my old age is completely covered, as is my "standard" RE age with SS, and now I am filling that first bucket, when the kids are in college and I want to travel a lot.
It also can help guide which vehicle(s) you save in - for example, if you have a pension and protected retirement accounts, and you can't access any of that until 65, then you might already have a full "pot" from 65-95 -- but maybe you don't have enough in accessible funds to cover the period from (say) 45-65. [I don't know UK rules about early withdrawal and such, sorry] And when I get closer to the target RE date, it will also guide my asset allocation -- e.g., my first "bucket" will be more conservative, because I will need ready cash in case of a market crash, so I will likely do something like a 7-year bond ladder with a chunk of that. OTOH, my "old age" bucket I still won't need for another 25 years, so that can stay in the market.
