How to determine if you are wealthy!

[jodi]

Wow, that's depressing. I thought we were doing better than that. At age 28 my net worth should be $56k. That seems awfully high to me for someone my age. I'd be over halfway there if it weren't for DH's (newly accumulated) student debt.
Maybe I'll try this again when I'm well into my thirties...of course, DH will be working again by then, so the formula will probably tell us we should have twice as much!

[Snoopy2645]

Glad to know I am not the only one who th0ought it was depressing LOL I am 29 so close in age to you I also thought oh my how could we have saved that much KWIM

[thekid]

Originally Posted by pearlieq

I think their formula is nice as one way to measure wealth, but I think there are some serious flaws, especially for younger folks.

When you are young, your income flucutates and can grow quite rapidly--the formula really doesn't account for that.

For example, say you're 25 and make 100k per year. According to the formula, your net worth should be $250,000 (interesting, since when you were 20 you were probably making 10k a year at a part-time job). However, say in the next year you got a nice raise and your spouse began working. Now you're 26 and your income is 150k. All of the sudden your net worth is supposed to be $390,000.

I don't think even the most prodigious of PAW's could parlay an extra 50k a year in income into another 140k in net worth in just a year in any kind of "normal" context.

I find the formula interesting, but I won't be paying too much attention to it until I hit my late 30's or so.

My thoughts exactly. It is almost impossible to meet those criteria until your mid/late 30s, especially if one has gone to college/grad school and starting working a little later (particularly if one then started working at a high level of income oddly enough). I find it odd that the authors of that otherwise very interesting book never adressed this.

[greedy4chips]

At this point in time we are Under Accumulators of Wealt (UAW). However if you give me another 7 years at a ave return of 10% on our 401Ks, IRAs, etc we will be AAWs.

This is because our investments will double while the formula will only result in a 18% change in wealth. I am 38 now and will be 45 in 7 yrs.

Example
$100,000 * 38 / 10 = $380,000
$100,000 * 45 / 10 = $450,000
Only a $70,000 difference or $10,000 per yr or 18% increase in wealth.

By age 65 and a very small return on our investments we will be SPAW (Super Prodigious Accumulators of Wealth), since we will only need to have $650,000 in net worth if we maintain a $100,000 income (we don't now!).

For me a better formula would be AGE * INCOME * (1 / (100 - AGE)) * ((AGE - 20) /6)

Example AGE 25 INCOME 50000

AGE * INCOME * (1 / (100 - AGE)) * ((AGE - 20) /6) = WEALTH
25 * 50000 * 1 / 75 * ((25-20) / 6) = $13,888.89
55 * 50000 * 1 / 45 * ((55-20) / 6) = $356,481.48
65 * 50000 * 1 / 35 * ((65-20) / 6) = $696,428.57

[autoxer]

Originally Posted by thekid

I find it odd that the authors of that otherwise very interesting book never adressed this.

For a book full of so many great statistics, you would think they could come up with a better formula, but I guess they were trying to keep it simple.

Another reason I think it is flawed, is because their ideal net worth only increases by 10% of your income each year. I think a Prodigious Accumulator of Wealth would increase Net Worth by far more than that.

35 year old x $50,000 / 10 = $175,000
36 year old x $50,000 / 10 = $180,000

Even if you didn't save a cent, you would only need a 2.8% return on your investments to match that increase.

[Ima saver]

I notice the two examples they used in the book, were ages 41 and ages 61. If I had $5000 in my late twenties, i thought I was doing pretty good!

[disneysteve]

Originally Posted by Ima saver

pearl, I think you are exactly right. I think it is a lot more accurate for people in their 40's and 50's! ( I also can't imagine making $100,000 in one year)

We are ahead based on my income, but pearlieq's comment applies perfectly to us. My wife went back to work in 2005 after 10 years as a SAHM. So suddenly our income rose but our net worth didn't change - not right away at least. We are saving virtually all of her salary, but it will take a few years for our numbers to fit the formula based on our new total household income. We are pretty close, though, depending on where you value our home.

[disneysteve]

Originally Posted by autoxer

Another reason I think it is flawed, is because their ideal net worth only increases by 10% of your income each year. I think a Prodigious Accumulator of Wealth would increase Net Worth by far more than that.

35 year old x $50,000 / 10 = $175,000
36 year old x $50,000 / 10 = $180,000

Even if you didn't save a cent, you would only need a 2.8% return on your investments to match that increase.

Their formula probably factors in annual pay increases of 2 or 3 percent also.

So 36 year old x $51,500/10 = $185,400 in your example.

[AK 47]

I'm a little under, but I''m young and that formula is not good for those under 30. I'll be over in the next yr or so.

[TBH]

Another UAW pipes up. Based on my age, we're 78K behind. Based on my spouse's age, we're 158K behind.

[Ima saver]

Did you marry a younger man?

[TBH]

Originally Posted by Ima saver

Did you marry a younger man?

Nope. I'm 29, he's 43. Everyone always thinks we're the same age--both in our mid thirties. It's annoying now, but it will be worse when I'm in my late thirties and he's fifty and everyone thinks we're both 45.

[autoxer]

There is a formula here that seems to cover a much wider age range:
http://www.freemoneyfinance.com/2006..._compute_.html

((Age - 20) / 240 + .1) x (Age - 20)

So if you are 30 years old, then you should be worth 1.42 times your annual salary. This formula compensates for the curve that your Net Worth progress will start off slow & gain momentum.

Age - Net Worth divided by Annual Income
20 - 0.00
30 - 1.42
40 - 3.67
50 - 6.75
60 - 10.67
70 - 15.42
72 - 16.47

There is also an interesting comment on that page about basing your retirement estimations on your annual spending, instead of your annual salary. So if you get a big raise, that doesn't automatically change what your net worth should be, unless you plan on raising your standard of living as much as your raise.

[disneysteve]

Originally Posted by autoxer

There is also an interesting comment on that page about basing your retirement estimations on your annual spending, instead of your annual salary.

Thanks for the link. I like that formula and discussion.

Another thing stood out to me. They base their retirement planning on a retirement age of 72! I think we are going to read more and more projections based on ages over 65 since fewer and fewer people are going to be able to afford to retire at the traditional age of 65 due to inadequate savings during their lifetimes.

[Snoopy2645]

well that makes me feel better by my income & my husbands we are at about 1.5 our annual income for savings with the house & banking stuff. And I am 29 & he is 31 so I averaged us to be 30 guess we are doing ok for our age but I know we could be doing a heck of alot better I am working on that I havent ate out at all this week & have limited my trips to the grocery store so we shall see!!!

[safari]

I don't think a person who retires at 72 would need need to have savings equalling 16.47 times his annual income. Even if that person put all the money in his checking account which doesn't earn any interest, he would be able to live 16 more years spending the amount equal to his yearly income before he retired, which puts him at 88. Now if he just draws the money out of his checking account, he won't be paying any taxes, unlike when he was still working, so essentially his income during retirement will be 35%+ higher, considering all the taxes. In addition, if he keeps his money in a high-interest savings account earning 5% APY, that would increase his income substantially. For example, assuming his salary in the last year before retirement was $60K, so if we multiply it by 16.47 we get $988K -- that's how much that person had saved. $988K * 5% = $49.4K -- that's how much interest he would earn every year. That means that in order to maintain $60K income a year, his savings would only decrease by $10.6K each year, so he can live off his money a lot longer than 16 years. Of course, nobody in their right mind would keep a million $$ in a savings account. A large portion of his savings would be invested in bonds/mutual funds, etc., which would give him a much better yearly return than 5%. So those of you who are afraid they won't be able to catch up, don't panic, just save as much as you can and you won't have to work until 72.

[amberfocus]

Like the previous posters have said, the (age)*(annual salary)/10 formula does not work if you're young.

I'm 21, three months out of college, $22K in debt (student loans), and working a job that pays $32K. The formula thinks I should be worth nearly $70K. They are bloody dreaming. Even using my college work-study salary, I'm still way under.

According to the formula posted by autoxer, though, I'm only slightly under the $7K that I should be worth, and this is based on my current salary. (I'm worth not-quite $5K.)

Give me a few more years. Or (ahem) decades. I'll catch up.

~mimi

[BCHGRL]

greedy4chips formulas are much more accurate for those of us in our twenties. According to that formula, hubby and are almost exactly on target.

[boefixepa]

According to the first formula I am 72K behind, and I turn 31 soon....

According to the greedy4chips I am 2K ahead of the game...

Whatever formula you use I know I need to do better and get I'm trying hard to do so...that' why I am here...I guess that's why we are all here.

Ask most people and I bet they couldn't even tell you their net worth...so I guess the first step is to know what it is...

[lrjohnson]

Well, using the new formula I am only five digits behind not six.

However it's still very close to six.