Net Worth by Age

If you search the term Net Worth by Age you are sure to get lots of results, both for articles that address the topic – usually in terms of how Americans stack up against each other – and calculators to help you determine where you should be at a given age.

Check Your Piggy Bank

If you have been reading this blog for a while, you know that I’m not really a fan of thinking in terms of net worth, particularly with respect to retirement planning. In fact, one of my most viewed and discussed blog posts is Net Worth is a Useless Metric. In the post, I make the case that people are better off focusing on marketable assets (financial wealth) and developing multiple streams of income when they engage in retirement planning.

Pink Piggy

However, there is no denying that most are familiar with the term and more importantly, like to use net worth when evaluating their financial health. With that in mind, I thought I would share a basic formula to give people an idea where they might aspire for their net worth to be with respect to their age and income. The formula is as follows:

(Age x Annual Income) / 10

As an example, let’s assume the following for a fictional couple. The 37-year old husband earns $38,500 annually and the 34-year old wife earns $61,250 annually. That gives us an average age of 35.5 and $99,750 annual household income. Using our formula …

35.5 x 99,750 = 3,541,125 / 10 = $354,112.50

The table below provides a quick guide to various ages and incomes …

Net Worth - Age and Income

If a 65-year old couple retired with an annual household income of $100,000, this formula suggests they should have a $650,000 nest egg. Furthermore, if we used this formula/table in conjunction with the 4% Rule, we would calculate that their nest egg would generate an annual retirement income of $26,000.

Of course the Age/Income formula doesn’t account for any defined benefit plans (pensions) or Social Security benefits. While that $26,000 isn’t a lot of money on its own, combine it with other sources on retirement income – perhaps our 65-year old couple enjoy a $25,000 pension from the wife’s previous employer and the couple receives a combined $35,000 from Social Security – and they are looking at $86,000 annually. Not too shabby.

Final Thoughts

The formula presented here is just one tool to use, one guide to consider, as you determine where you’re at and where you would like to be as you conduct your retirement planning.

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.

15 Comments

  1. Hey, good post, but I have some questions about the values that this equation produces. My savings rate has typically been between 40-60% which is much higher than the average. My current pre-tax salary is $125,000, and I’m 26 years old. This means that my net worth should be (125,000 * 26) / 10.0 = $325,000.

    My net worth is closer to $125,000. I know that this equation typically hurts younger people (below 30), but my net worth is about 3x less than it recommends and I’d guess that I’m at least in the 80th percentile of savers in America.

    What troubles me is the numbers at the older end of the spectrum. Let’s take me as an example. I have $125,000 currently invested. If I contribute no additional money, I can expect my investment to double every 10 years (rule of 72, assuming 7% average yearly real return). Since I have 40 more years before I turn 65, my investments should double 4 times. $125,000 * 2^4 = $2 million (In reality this number would be closer to $1.87 million but it is close enough). However, the equation says that I should have $815,000 which is more than $1 million off assuming that I don’t invest another dollar for the rest of my life which will not be the case.

    • You are absolutely correct in that this guide ‘hurts’ younger persons by suggesting they don’t have enough AND underestimates what someone’s net worth might be at an older age. As I note in the post, the formula is just one tool to help you determine if you’re somewhere close to where you need to be as you conduct your retirement planning.

      As I also note in this post, and others, I’m not really a fan of measuring net worth anyway. Particularly with respect to retirement planning I believe it’s much more important to focus on calculating how much retirement income will be needed, and ensuring you develop enough sources of passive and portfolio income to cover projected retirement expenses.

      At the end of the day, the guide in the post is just that, a generic guide to give people some context to their financial/retirement planning. As I note in my book, and any number of posts on this blog, retirement planning is very specific to the individual and the key is to develop – and manage – a plan based on your own unique factors.

      Considering your current income and savings rate, you are way ahead of most 20-somethings – hell, most 20, 30, 40 and 50-somethings – and if you keep doing what you’re doing you’ll be more than fine come time to retire.

      Thanks for taking the time to stop by, my friend.

      • Thanks for responding. The formula really penalizes young people and underestimates compounding interest. Net worth is only as important as the income that it can generate. If you have a $1 million home but only make $50,000 a year with no other income streams, you’re in trouble if you don’t sell your house immediately.

        Do you have any posts that switch to your preferred idea of measuring passive income? For example, “How much passive income you should have by age and income?” Could be a good post idea.

        Cheers

        • I haven’t given any thought to passive income by age and income. My take is that you need to put yourself in a position where your portfolio and passive income can cover your retirement expenses. Of course the ratio will vary for each family/individual.

          We might have one family who desires $100,000 annually in retirement and projects that they will get $50,000 of that from passive sources (e.g. Social Security, defined benefit plans, etc.). In their case they will need their portfolio to generate the other $50,000. If we use the 4% rule, their portfolio would need to be $1,250,000.

          A family down the street might determine they need $75,000 annually in retirement and projects they will draw $60,000 annually from their investment accounts … leaving them $15,000 short. In their case they need to be sure that their passive sources will cover that amount.

          At the end of the day – and I talk about it in Multiply Your Streams of Income – the best approach is to develop as many streams of income – from passive and portfolio sources – as possible both during the working years and in retirement because you never know when something beyond your control will negatively impact one or more of your streams and you want to be sure your expenses are covered regardless of what happens.

  2. Thank you, James, for a very handy new worth “rule of thumb.” Measuring tools never hurt. They help you gauge your progress–or lack there of. And thank you all for pointing out the primary flaws of net worth calculations. Net worth is important, but retirement income streams are more so. Once the latter adequately addresses your expenses, you’re all set.

    • Indeed. The primary focus has to be on retirement income streams.

  3. This is an interesting breakdown, James. I agree with the above commenter commending your focus on multiple income streams over net worth. Thanks for the post.

  4. Thanks for sharing this neat little framework James. This is a great way to ballpark (especially combined with the 4%) rule. That said, I tend to agree with your comment that income streams are more important than net worth.

    • “I tend to agree with your comment that income streams are more important than net worth.”

      Indeed. Multiple, and diverse, streams are key. Strictly from a tracking (where am I?) perspective, I suppose net worth as traditionally calculated, and this quick guide/formula, has some value. However, for retirement planning, it’s all about what are you sources of income, where are they coming from – i.e. passive [e.g. pensions, Social Security] and portfolio [e.g. brokerage accounts, 401(k)s, IRAs – and the tax category for each.

      Thanks for stopping by, my friend.

  5. Very cool. Nice little “status checker” to see if we’re on track. First I’ve heard of that formula, but I like it. Simple.

    • Indeed. It’s a good tool for a quick spot check, which hopefully leads to more detailed analysis.

      Thanks for stopping by, my friend.

  6. I won’t lie. This made me so nervous. I jumped into the equation before I finished the post…and before I thought through my situation. I used our pre-tax annual income, but then I forgot about our pensions! We both have 10% of our salaries put into pensions, and I don’t calculate those in our net worth. Phew! Breathing a bit easier now 😉

    Thanks for laying this all out so carefully.

    • You hit on one of the key points I make in the Net Worth is a Useless Metric post. While investable assets (becomes portfolio income) is one component of net worth, the other important aspect is passive income, such as defined benefit plans and Social Security (pensions), which are not a part of the net worth calculus. The other components of net worth, values of automobiles and homes, aren’t really relevant for retirement planning. Ultimately, retirement planning is about developing your sources of passive and portfolio income.

      • James, good point about the downsides of Net Worth, and a good example of why you can’t compare net worth (between bloggers, for example) and make any meaningful conclusions. What matters is how much income can you generate from your assets, and how does that compare to your spending needs in retirement.

        If you have a pension that covers 100% of your spending needs (extreme example, to make a point), you could theoretically have a Net Worth of $0 and still be fine. On the other hand, you could have $1M, but if you need to generate $80k of living expenses you’re in trouble.

        You’ve raised a good point, and one I hadn’t thought about prior to this post.

        • “What matters is how much income can you generate from your assets, and how does that compare to your spending needs in retirement.”

          Exactly.

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