What should my net worth be ?

[Delawaredave5]

I've seen below before, probably debated here too. Interesting comparison for a hypothetical person 60 years old, making 100k, paying 25k tax, hoping to retire on 80% of take home.

4% rule would suggest needing: $1.4million (100k-25k * 80% *25)

Below would suggest: $600k ($100k * 60 / 10)

Usually these "simple calculators" don't handle the extremes well - overestimates "should be" net worth for young people and underestimates for older people.

The Simple Dollar » What Should My Net Worth Be?

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

 

[Enuff2Eat]

What should my net worth be ?


as much as possible.

 

[plex]

Basically a person can never use income to determine net worth goals are or status checks. No matter how you form the calculation, since the method is inherently flawed.

It will almost always places a person well below, or well above, where they "should" be. Then, on top of this, where they "should be" tends to be a completely useless number since it has nothing to do with the actual amount a person needs to be secure.

 

[growing_older]

Regardless of which method you settle on, you probably cannot subtract taxes paid when working to get income desired when retired. There will be some differences, you won't pay SSI if you're not working, or possibly withdrawing principal or using tax advantaged accounts, but much of your income will still be subject to tax and needs to be accounted for in the 4%.

The Millionaire Next Door formula would suggest 100K * 60 / 10 = an Average Accumulator of Wealth networth. A PAW would be at least double that, or $1.2 million. Also, the AAW or PAW formula is a guide for what people have saved -- not a guide for what they will need to be financially independent.

In the article you cite, the author was concerned that the above figure was too high, so modifies the above formula to (100k - 20k) * 60 /10 which gives $480,000

Or you can just look for average networth by age data on the internet. It's very low, well below any of these calculations, so you are likely going to find it little use in it for planning purposes.

 

[Gearhead Jim]

Net Worth needs to be calculated and viewed in a brutally realistic way. Many people are pleased by what they consider to be their net worth, but did they write down that $500,000 house to $250,000? And as time goes by and the house price (hopefuly) recovers, it will start needing more repairs? Did they understand that the new Corvette might still have a market value of $50,000 but they plan to keep driving it, so from an income standpoint it's worth $0?

 

[Surewhitey]

I just take the average annual need of our family, multiply by 20 and anticipate a modest 3% over inflation return. We currently live on $2k, but I anticipate that to be $4k when we get back to the states...we're "saving" the other $2k until then.

So my personal calculation is $960k-ish; We're 20 years away from SS and at least 10 years away from a small pension of $1k/mo, so my calcs are conservative as I do not put these into our long-term calcs.

 

[W2R]

Usually these "simple calculators" don't handle the extremes well

I agree! Most of them are terrible IMO. In planning my retirement, I gave up on passively accepting what articles like this said should be my net worth or portfolio size.

To those reading this - - take charge of your retirement planning! Don't surrender that responsibility to any article or calculator like this. I took charge of my own retirement planning, and at any given time my net worth, portfolio size, and progress should have been (and were) as much as or more than what my plan said they should have been. That works. Plus, if the responsibility is on your shoulders you are more likely to hit the books, research, and make this judgment as though your life depended on it, which it does.

I think it is a lot more helpful to focus on how much you spend now, and how much your portfolio (plus pension if you have one) will support for an inflation adjusted retirement of the length you have planned. When those two match, with a little safety cushion, you are there. If they don't match, save more and spend less!

 

[MichaelB]

I agree! Most of them are terrible IMO. In planning my retirement, I gave up on passively accepting what articles like this said should be my net worth or portfolio size.

To those reading this - - take charge of your retirement planning! Don't surrender that responsibility to any article or calculator like this. I took charge of my own retirement planning, and at any given time my net worth, portfolio size, and progress should have been (and were) as much as or more than what my plan said they should have been. That works. Plus, if the responsibility is on your shoulders you are more likely to hit the books, research, and make this judgment as though your life depended on it, which it does.

I think it is a lot more helpful to focus on how much you spend now, and how much your portfolio (plus pension if you have one) will support for an inflation adjusted retirement of the length you have planned. When those two match, with a little safety cushion, you are there. If they don't match, save more and spend less!

Well said!

 

[East Texas]

It's not how much you make or how much you're worth - it's how much you spend. I realize net worth includes most debt in the equation; however, it does not take into account total spending. Until you can get a handle on spending, the other calculations are just... calculations.

 

[Amethyst]

Yes. And make sure Spending includes Taxes.

A.

It's not how much you make or how much you're worth - it's how much you spend. I realize net worth includes most debt in the equation; however, it does not take into account total spending. Until you can get a handle on spending, the other calculations are just... calculations.

 

[Ronstar]

It's not how much you make or how much you're worth - it's how much you spend. I realize net worth includes most debt in the equation; however, it does not take into account total spending. Until you can get a handle on spending, the other calculations are just... calculations.

Not totally true. Net worth essentially equals income minus spending. So Income has as much affect on net worth as spending. For retirees and most others, it's easier to reduce spending than increase income in raising net worth. But for some, it's easier to increase income. Income can be increased an infinite amount. Spending can only be cut so much.

 

[justplainbll]

Would a conservative net worth requirement at retirement, exclusive of non-income producing assets plus present value of pension entitlements, be equal to 75% of (100 - retirement age) x average of annual highest 3 years of normal pretax earned income?

 

[Chuckanut]

Many people are pleased by what they consider to be their net worth, but did they write down that $500,000 house to $250,000? And as time goes by and the house price (hopefuly) recovers, it will start needing more repairs? Did they understand that the new Corvette might still have a market value of $50,000 but they plan to keep driving it, so from an income standpoint it's worth $0?

IMHO, when figuring net worth for retirement purposes one should only count financial assets that are available for producing dollars one can spend, either through income, sale or So, if one is going to sell the 50,000 dollar Corvette and buy used $10000 Cobalt, one can count the $40000 towards retirement assets. Same goe with the house, if you are going to sell it, buy a cheaper one pocket the difference.

Me? I only count mutual funds, bonds, and savings accounts. In the future I wil add in SS and a modest pension.

 

[Huston55]

Would a conservative net worth requirement at retirement, exclusive of non-income producing assets plus present value of pension entitlements, be equal to 75% of (100 - retirement age) x average of annual highest 3 years of normal pretax earned income?

After running a few scenarios, this seems overly conservative to me. This method would likely have you working longer than necessary, by a lot of years. Also seems overly dependent on last 3 yrs income, which is not necessarily related to retirement income required.

I think a better approach is to start with an estimate of expenses and go from there using some of the approaches outlined in other strings of posts.

 

[East Texas]

Not totally true. Net worth essentially equals income minus spending. So Income has as much affect on net worth as spending. For retirees and most others, it's easier to reduce spending than increase income in raising net worth. But for some, it's easier to increase income. Income can be increased an infinite amount. Spending can only be cut so much.

Unfortunately, there's a whole lot of people out there who don't consider discretionary spending a liability.

 

[l2ridehd]

Net worth is total assets minus total liabilities. Not at all like what you need to retire. The calculation for retirement is total income minus total expenses with an adjustment for inflation, time, and risk.

There are a great number of things that can always change the equation. What will the rate of inflation be for the next 30 years and how will that be time phased? 20% inflation in year one and two of retirement is a whole lot worse then year 29 and 30.

Do you believe SS will always be there? Medicare? Your health? Another market crash? Another market boom?

You can plan and mange a lot of these things, but not all. I have built a very detailed plan that shows I will be successful in 99% of the possibilities. My income will exceed expenses by 35% using a SWR of 3%. But I still can have unknown risks, so always have a plan B.

 

[rescueme]

Net worth is total assets minus total liabilities. Not at all like what you need to retire. The calculation for retirement is total income minus total expenses with an adjustment for inflation, time, and risk.

That's the way I look at it.

During my wor*ing/accumulation years, net worth (more specifically, estate net worth - what would be distributed if I died tomorrow) was a simple gage to see if I was "advancing", year over year.

In retirement, net worth means little. Heck, I could have $0 in retirement investments yet cover all my required expenses (however you want to define "required") with possibly a pension, SS, and other income "products".

For me, it's just a feel good/bad measurement. If it rises year over year (while employed), good. If it goes down slightly year over year in retirement, so what? It's decumulation, which is expected for this time in life. As long as I have enough "air in the tire" to get me to the next service station, that's all that counts in this stage of life.

Also, don't forget the definition of net worth, as related to couples. Does each have to have at least $1M in assets? From a "family unit" view, that would mean that they are multi-millionaires. That's quite different from one person being a multi-millionaire.

In the end, does it really matter what your net worth is? Money/assets are for the living, not the dead. As long as I (and DW) have enough to get by until our personal "end of time", that's all that counts, IMHO.

 

[donheff]

The Simple Dollar » What Should My Net Worth Be?

Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.

I just read a Lifehacker article that says Simple Dollar critiqued that method and proposed an alternative. From the article:

Instead The Simple Dollar recommends this formula for roughly determining what your net worth should be: (Average of your last 10 years of annual income) minus ($15,000 and an additional $5,000 for every person in your household, including you). Multiply that by your age and divide by 8. This is designed to take into account people with large increases in income over the years.
​

If you want to use one of these guides that one seems a little better to me. But all of these rules from this to the old "make your age" from the 60s are pretty dumb. Set a target based on the income you want to achieve from investments. Then evaluate what it will take to reach the target by a given age.

 

[Retire2013]

Basically a person can never use income to determine net worth goals are or status checks. No matter how you form the calculation, since the method is inherently flawed.

It will almost always places a person well below, or well above, where they "should" be. Then, on top of this, where they "should be" tends to be a completely useless number since it has nothing to do with the actual amount a person needs to be secure.

+1 -- Perfectly said.

 

[justplainbll]

Basically a person can never use income to determine net worth goals are or status checks. No matter how you form the calculation, since the method is inherently flawed.

It will almost always places a person well below, or well above, where they "should" be. Then, on top of this, where they "should be" tends to be a completely useless number since it has nothing to do with the actual amount a person needs to be secure.

Retirement income is likely to be highly correlated to net worth, particularly if the present value of pensions and SS retirement benefits are included in the calculation of net worth.
Based on the lifestyle I was accustomed to during my working years, I am (and prefer to be) well above where I "should be"; thank you very much.
Hopefully uncle sammy will not go to much further in dictating the actual amount we need to be secure.

 

[youbet]

In retirement, net worth means little. Heck, I could have $0 in retirement investments yet cover all my required expenses (however you want to define "required") with possibly a pension, SS, and other income "products".

For me, it's just a feel good/bad measurement. .

As you say, "for you" net worth is just a feel good/bad measurement. But for many others whose primary source of retirement income is withdrawals from a FIRE portfolio, net worth is everything as it could represent one's only source of income.

Folks like you and I who didn't retire early but rather waited until our late fifties and who will have significant SS and/or pensions will obviously have a different POV than folks retiring in their 40's with no pension and/or SS.

 

[racy]

Net worth should be at least: Multiply your 'age minus 27' by your pretax annual household income and divide by five.

I don't remember where I got this, but I copied and pasted it next to my net worth statement on my computer.

 

[obgyn65]

+2. That's exactly the way I have realized that I have been financially independent for a while now. Living frugally and earning a very good income have helped.

I think a better approach is to start with an estimate of expenses and go from there using some of the approaches outlined in other strings of posts.

 

[Amethyst]

So up till age 28, it's OK to have a net worth of zero?
A.

Net worth should be at least: Multiply your 'age minus 27' by your pretax annual household income and divide by five.

.

 

[arebelspy]

So up till age 28, it's OK to have a net worth of zero?
A.

Zero at 27. Negative before that.

That's the idea behind at calculation, by that age you've been out of college for only a few years, so you likely have large student loans, car debt, only a few years at a job (if you found work out of college) so little or no retirement savings, etc.

If you don't have that debt (such as no college loans) at 25 or whatever, by that calculation you're ahead of the game.