Measuring success

[Whakamole]

I'm not sure how on topic this is for this thread, but here goes...

One of the ideas in "The Millionaire Next Door" is the PAW/UAW concept. The author gives the guideline that your net worth should be equal to (annual salary * age / 10.)

Frankly I'm still not there yet, but part of me wonders how accurate this is if you are a 20something or even an early 30something.

What kind of metric do we, or should we, have for determining how good a saver/investor you are?

 

[unclemick]

My 2 cents - MAX every taxed deferal vehicle out there as early as possible and let time do it's thing. Learn to live on the rest.

Stanley and Danko will probably make most people under 30 feel bad.

If you are are 'hard core' frugal you may save more. 15% (of before tax income) as minimum start.

 

[Cut-Throat]

Mole,

One of the ideas in "The Millionaire Next Door" is the PAW/UAW concept. The author gives the guideline that your net worth should be equal to (annual salary * age / 10.)

The problem with formulas like these is they might work OK for the Median ages and salaries, but don't work well on the extremes.

Examples : When I was 30 I was in debt and had a negative net worth.

Today I'm 52 my annual salary is zero. So based on this, I need to have a zero net worth. Yipee I'm way over that!!

 

[wabmester]

I guess the "correct" approach to determining if you're on track is:

1) Figure out what your spending needs will be in retirement. Some say it's 30% of your current spending, some say it's 110%. I lean more towards 110% myself.

2) Multiply your spending by 25. That's your minimal nest egg goal in today's dollars.

3) Determine the year in which you want to retire.

4) Estimate the growth of your current nest egg in the year you want to retire. Use an average real rate of investment returns -- about 2.5% for bonds, and about 4.5% for stocks.

5) The difference between (2) and (4) is the additional amount you need to save between now and retirement.

6) Use a savings calculator like this one to figure out your periodic savings needs:

http://www.bankrate.com/brm/calc/savecalc.asp

Remember to use real (vs nominal) return estimates in the savings calc since the dollars are not adjusted for inflation.

 

[Skylark]

That helps a lot.

Can anyone tell me the formula for the following:

Given:
Total amount to be saved
Number of months to save
Real rate of return (%) (annual)

Calculate the monthly payment, compounding interest monthly

I'm stumped. I guess thats why I fell to the lowly position of manager, he who tells the engineers what to do and makes sure they don't screw up (too much).

 

[wabmester]

I think what you want is

F = P(1 + r)n + c[((1 + r)n + 1 - (1 + r))/r]

Where F is the future value, P is present value, c is periodic contribution, n is number of contributions, and r is growth rate.   Solve for c.

Or just use the calculator link I gave above.