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.
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 …
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.
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.