I read an article last night citing a formula from The Millionaire Next Door of how to calculate what your net worth should be given your age and income. Their formula of taking your income x age /10 seemed to not really account for increases in income or people who were saddled with debt coming out of college.

This morning I found another that came amazingly close to my actual net worth which revised the formula slightly to take an average of your last 10 years, subtracting $15,000 for a living wage and subtracting $5,000 for each person living in the house, and then multiplying by your age and dividing by 8.

I was wondering if anybody else had a different take on the matter of how to calculate what your net worth ought to be at a given age and wondering where most people were in regard to this goal.

Age 56.

Using formula #1 I am at 3X the number.

Slightly less using formula #2.

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Their formula of taking your income x age /10 seemed to not really account for increases in income or people who were saddled with debt coming out of college

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I wouldn't worry so much about a magic number, it can make you crazy. If you're going to be a company man, fund your Roth and 401k until you reach IRS maximums. If you start a business, work your ass off to achieve a valuation you would feel comfortable getting bought for. Do this and you'll be doing better than most, that's a certainty.

Both formulas came out quite close. Regardless, I am also about 3x that number.

Good insight gawn...

Fife, if you don't mind my asking, how old are you?

I ask because I wonder how big of a role age is as well as a sustained period of X income.

I have a pretty large disparity between the 2 different formulas and it has a lot to do with failing to factor in a somewhat sharp increase in income over the last 4-5 years.

Edit made to original post.

The second formula should be:

Avg last 10 year's pre-tax income
- $15,000
- $5,000 x # of people in house
X age
/ 8

Since I'm fresh out of school, this formula doesn't work for me. I have no debt, but the formula gives me about 2.25x my current income.

In comparing both formulas the difference was only 25k for me.

My difference was about $360,000 with my actual being between the 2

The first formula could make sense if its just looking at how much NW you should have accumulated compared to what income you were making. But there's too many variables that could throw this off. Debt coming out of college, allowance from your parents, inheritance, number of kids, how much your spouse contributes to expenses/earns, whether or not you're supporting an elderly parent or parents, etc.

That was the criticism offered up by the authors of Formula 2 in an effort to account for some of those factors.

I think these formulas aren't relevant until atleast your mid 30s. In your 20s, your net worth, regardless of job, is way too tied to your parents' wealth and their financial support of you, time spent developing an asset (education, degree(s)) and forgoing earning, etc. Extreme examples of this are doctors and the like who may not start earning money until their late 20s and have a significantly negative net worth, but I think its true of lots of people who have to pay for school themselves and/or pursue any grad school and up degrees.

In your early years, work to pay down debts and start retirement accounts and building that nest egg. I think its futile to really measure where you are at until you are 35, atleast.

I'm 36, but I went to grad school and had a job in higher ed for the first six of the last 10 years.

Formula #1 is high - I meet the result if I include the estimated equity in my house. My income last year was 81% more than my average income for the six years I was in higher education, so that skews the number.

If I use the second formula, I have a little bit more than what the formula says I should have without including the equity in my house (ie, only considering savings/retirement accounts).

I would echo what a previous poster said about maxing out retirement accounts and not worrying too much about these sorts of calculators. I have not always maxed mine, but when I worked for the university, between my contributions and their matching to my 403b and my pension, my total savings was about 15% of my salary. IIRC, my contribution was only 7.5%. Now, I didn't get all of that back when I left (I lost the portion of the pension that I wasn't vested in), but I made sure that when I moved to the private sector my combined (mine plus employer match) pre-tax savings remained at 15%. Keeping total savings at 15% required that I contribute a higher portion my own money, but I got a significant raise when I left higher ed, so my take home still increased. I maintained that 15% until very recently, when I finally increased my pre-tax savings to hit the IRS limit. I think it's important that every time you get a raise, you increase your pre-tax savings accordingly. It's easy to forget or postpone doing that when you see the extra money in your paycheck.

Agree with Squirrel.

I am way behind according to the first formula, even though most would probably say I am doing fine... well everyone but TexAgs. I didn't use the second formula because I only have a little over 3 yrs experience.

I am 25, married, one daughter w/ another on the way. I am not a petroleum engineer so I don't make 6 figs yet, but am on a pretty solid career path & make a solid base salary. My wife & I combined have paid off nearly $70K of debt since we graduated (she graduated after me). Investments aren't as high as I would like, but that's coming from someone who reads investment forums all the time. I probably have more "invested" than 95% of people my age in this country, but that probably isn't saying much either haha.

considering total household income, right?

I guess the real question should not be where do you compare to the formula, but are they decent measuring sticks to begin with.

In the first a 65 year old making $150k would have a net worth figure of $975k. If that is truely net worth including home equity that isn't very much, and probably not a target someone should be aiming for. If it really includes home equity figure maybe a $200k house, so $775k other assets. Pulling 4% annual nets $31k/year before taxes.

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I guess the real question should not be where do you compare to the formula, but are they decent measuring sticks to begin with.

In the first a 65 year old making $150k would have a net worth figure of $975k. If that is truely net worth including home equity that isn't very much, and probably not a target someone should be aiming for. If it really includes home equity figure maybe a $200k house, so $775k other assets. Pulling 4% annual nets $31k/year before taxes.

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I don't know how these formulas are presented by the people who create them. But I suppose they are simply measuring sticks that help you compare yourself to a standard of sorts. This measure might not be as important as the retirement planning calculators.

I'd say they aren't useless. If you are 55 and your net worth is $100K you are in trouble for retirement. I also agree it's not very useful early in a career. Too many variables early on.

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I read an article last night citing a formula from The Millionaire Next Door of how to calculate what your net worth should be given your age and income. Their formula of taking your income x age /10 seemed to not really account for increases in income or people who were saddled with debt coming out of college.

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For what it is worth, this formula in the book wasn't to determine how much net worth you should have, it was to determine how much you should have to be considered "wealthy". I'd say people saddled with debt out of college are not wealthy.

First formula seems off. Take a 60 year old. If he doesn't make much, say 80k, net worth should be 6x that or $480k. That ain't a whole lot of money to retire on. Only 6 years at current salary.

Say he made it ok and is making $300k. Net worth is 1.8m, which ain't a whole lot for someone making that kind of dough.

Either way, person only has 6 years of current salary. Most people retire on less, say 75%. So that's still only 8 years worth of income in retirement.

I'm tired so not sure if my math is correct.

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#1 is very close. #2 is way off, i assume because my income has more than tripled over the past 10 years and while i have two kids, they are both under 2.5 years old.

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Same reason my #2 was off - income is 3x 2005 levels partially due to being fresh out of grad school, however we have no kids.

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I read an article last night citing a formula from The Millionaire Next Door of how to calculate what your net worth should be given your age and income. Their formula of taking your income x age /10 seemed to not really account for increases in income or people who were saddled with debt coming out of college.

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For what it is worth, this formula in the book wasn't to determine how much net worth you should have, it was to determine how much you should have to be considered "wealthy". I'd say people saddled with debt out of college are not wealthy.

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Thanks for posting this. I wasn't sure what this formula was actually supposed to show.

How do you calculate "Wealthy Net Worth" based on Millionaire Next Door if you and your wife both work? Combined income and average age?

I think formula 1 is certainly intended for mid-career folks. Or only really appropriate for them, I guess. 40-50 range.

I don't see a formula that works for everyone because of all the different situations like were stated above. Here is a guideline that I like, but this isn't for everyone as people have different lives and financial wants and needs. Also some people have pensions or high SS payments, while others have no pensions or modest SS payments. So lots of different factors.
Age 25 - $0
30 - $25K
35 - $75K
40 - $200K
45 - $450k
50 - $750K
55 - $1.1MM
60 - $1.5MM
67 - $2MM - retire
70 - $1.9MM
75 - $1.65MM
80 - $1.3MM
85 - $900K
90 - $450K
95 - $0

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I don't see a formula that works for everyone because of all the different situations like were stated above. Here is a guideline that I like, but this isn't for everyone as people have different lives and financial wants and needs. Also some people have pensions or high SS payments, while others have no pensions or modest SS payments. So lots of different factors.
Age 25 - $0
30 - $25K
35 - $75K
40 - $200K
45 - $450k
50 - $750K
55 - $1.1MM
60 - $1.5MM
67 - $2MM - retire
70 - $1.9MM
75 - $1.65MM
80 - $1.3MM
85 - $900K
90 - $450K
95 - $0

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No way this is right.

That chart does seem mighty low. If, at 30, I had only $25,000 to my name, I would be crapping myself.

Likewise, if I was 60 and had to live the next 25 years of my life on only $60,000/year, I might be rather nervous too.

I wonder how your'e supposed to handle kids away at college in Formula 2. By the formula your net worth should increase when they move out, In reality, exactly the opposite happens until they are off the payroll.

In that sense I guess Formula 1 yields a more realistic assessment of your net worth if your'e in that situation which I will be x 2 in the next 3 yrs.

fwiw, both formulas yield net worth numbers within 10% of where wer'e at so they appear to be pretty good rules of thumb in my case .

You guys at 3x those numbers, Congratulations to you.! How'd you do it?

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I don't see a formula that works for everyone because of all the different situations like were stated above. Here is a guideline that I like, but this isn't for everyone as people have different lives and financial wants and needs. Also some people have pensions or high SS payments, while others have no pensions or modest SS payments. So lots of different factors.
Age 25 - $0
30 - $25K
35 - $75K
40 - $200K
45 - $450k
50 - $750K
55 - $1.1MM
60 - $1.5MM
67 - $2MM - retire
70 - $1.9MM
75 - $1.65MM
80 - $1.3MM
85 - $900K
90 - $450K
95 - $0

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Agree this can't be correct as a guideline.

What it could represent is the current reality if you took a cross section of America right now of average net worth at each age bracket (actually reality is much lower than this according to everything I've read).

Here's a great article for the "above average" person, which most of us probably are. The net worth comparisons are closer to the bottom.

http://www.financialsamurai.com/the-average-net-worth-for-the-above-average-person/

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Here's a great article for the "above average" person, which most of us probably are. The net worth comparisons are closer to the bottom.

http://www.financialsamurai.com/the-average-net-worth-for-the-above-average-person/

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Interesting article but WAY off for older folks. The 401k stuff does NOT take into account that many many of us did not work for companies that offered 401k's while we were in our 30's and early 40's. They didn't even exist for the first decade or 2 of our working life. We are the " tweeners". Company pensions were being phased out and there were not any other retirement vehicles except for a pitiful $2000 /yr IRA. We did not have over 20 years of compounding or matching worth a damn.
I was 39 before I had access to a 401k and did not have a company match until I was 43...

This is why we are about to get killed with a generation unable to retire and it's not really their fault.

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Here's a great article for the "above average" person, which most of us probably are. The net worth comparisons are closer to the bottom.

http://www.financialsamurai.com/the-average-net-worth-for-the-above-average-person/

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Interesting article but WAY off for older folks. The 401k stuff does NOT take into account that many many of us did not work for companies that offered 401k's while we were in our 30's and early 40's. They didn't even exist for the first decade or 2 of our working life. We are the " tweeners". Company pensions were being phased out and there were not any other retirement vehicles except for a pitiful $2000 /yr IRA. We did not have over 20 years of compounding or matching worth a damn.
I was 39 before I had access to a 401k and did not have a company match until I was 43...

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Interesting.. I did not know that (I'm 26 and thankful for my retirement options). Keep in mind this is WAY higher than the average. I read an article that the actual average net worth of those in retirement years was a little over 300k.

http://www.usatoday.com/story/money/personalfinance/2015/01/31/motley-fool-net-worth-age/22415229/

No... It just means that many will HAVE to work long past 66 or 67. I'm outa here VERY VERY soon but most of my peers are talking about working for 10-15 more years out of necessity. That actually helps the younger guys since as long as we are working we are not straining the retirement system. The tax penalty for taking SS while working is very onerous until you hit 70.

Working until that age means what I said, unable to retire.

And it hurts younger generations because there are only so many jobs. More workers means more out of work.