Neat net worth formula - are you on track?

[disneysteve]

Here's a little formula I've never heard before.

Divide the number of years you have been working by 2.5 and then multiply your answer by your current annual income. The answer here indicates how large your net worth should be now in order to be financially on track to accumulating enough money for your retirement, assuming you will work approximately 40 years.

This comes from Stewart Welch III, CFP of the Welch Group, LLC.

[meaghanchan]

By that formula I'm WAAAAAY behind.

Is it an accurate estimate, though? A person who's been working about 2 and a half years, making $40,000, should have a net worth of $40,000? How many 25-27 year olds do you know who fit that bill, discounting the ones with trust funds or large inheritances?

I suppose it gets more accurate the closer you get to retirement.

The problem is, that's a linear equation. Most people's savings for retirement doesn't grow linearly, it grows exponentially with compound interest/ earnings.

Here's a link to a formula I like better (maybe just because, according to it, I'm ahead of the game!): http://www.freemoneyfinance.com/2006..._compute_.html

[Broken Arrow]

Yeah, I'm way behind too. But then, that's also why I'm trying so hard to catch up.

[humandraydel]

Well, as is usually the case with these linear net worth formulas, it is (IMHO) grossly out of proportion at the lower end of the spectrum. And, if you think about it, that makes sense since, due to compounding, net worth usually grows exponentially as one ages.

For example, I've been working 1.5 years. 1.5/2.5 = 0.6. And 60% of my salary is approximately 30k. Yet, due to student loans, my net worth is around -30k .

I did a projection to 10 years. My net worth should be around 300k according to the formula - my calculations tell me it will be slightly less, probably around 275k. This is with extremely aggressive saving though.

Maybe at 20 years the foruma starts to work better, I don't know. Bottom line is that I don't think a linear formula will ever fit (very well) an exponential curve like net worth growth.

[pearlieq]

I tried this on our current situation. I've been working for 6 years and am expected to have a net worth of 360k!!! I guess it's hard to use any formula when you're young and your income grows erratically.

To try for a more accurate picture, I did a future calculation. In 10 years, assuming a 3% increase in income each year, I'm supposed to be worth 1.2 million.

I guess the longer range one is a little closer to realisitc, but still much larger than I anticipate. Something to shoot for, I guess!

[PRICEPLUS]

I'm behind. Guess I'll have to work on it!

[The Budget Man]

What is meant by "Personal Net Worth"?

Does it include items you own such as vehicles, golf clubs, xbox games cash on hand etc?

The first time I tried to work out my net wealth I was astounded at how large the figure was. Then I had a reality check.

It is very easy to get carried away with "Net Worh". The unfortunate part of the equation is that if you had to sell many of the items they would be almost worthless.

Possibly a useful definition for what is included in new wealth should be cash plus items that retain or increase in value.

Your opinions!

[LivingAlmostLarge]

Awesome, finally we're ahead of the curve. 1 year savings should be $34k net worth, we're closer to $200k. Granted $115k of that is home equity, but finally! Awesome. We're 27 and 29 and only had a 401k 1 year.

[LuxLiving]

Like BA we are behind according to that calculator - and I chose to say 'like BA', because for Hubster and I this is our second marriage each. I don't believe enough people take into consideration how large a financial setback things like divorces and unnecesary moving around can make on their bottom lines. Walking away from a home that was almost paid for and then renting again until you get back on your feet can have a crippling effect on the net worth.

I think it was Ben Franklin who said something like "three moves equals one fire."

I think BA will be all right on the financial front in the future because he's realizing the effects time has on compounding his savings and investments and making rapid efforts at turning his ship around. I don't think The Hubster and I fully grasped this concept early enough and ran thru life willy-nilly spending here and there while not saving nearly enough.

Consumers beware - you are fast-food eating and Wii-ing your future away!!

[meaghanchan]

The thing is, those of you (including myself) who are 'behind' according to this formula aren't really behind- it's not a realistic formula!

As a linear equation, it assumes you will save 40% (yes, 40%!!) of your gross income every year, year in and year out, and then put it under your mattress, or a savings account earning 0.

Most retirement calculators take into account that you're putting your money into investments, and with compound interest and a decent return, you don't need to save anywhere close to 40%.

Anybody got a refrigerator box I can have?

[sweeps]

Originally Posted by rexdart

Anybody got a refrigerator box I can have?

Sorry, it's already occupied.

[LittleGopher]

I'm way behind, according to the formula posted by disneysteve, plus I don't have 40 years until retirement. I did the one suggested by meaghanchan, and came out slightly ahead. Hmmm - I was thinking of increasing the amount to our retirement savings again this year anyway! Interesting thread - definitely food for thought!!

[LuxLiving]

Originally Posted by meaghanchan

The thing is, those of you (including myself) who are 'behind' according to this formula aren't really behind- it's not a realistic formula!

As a linear equation, it assumes you will save 40% (yes, 40%!!) of your gross income every year, year in and year out, and then put it under your mattress, or a savings account earning 0.

Most retirement calculators take into account that you're putting your money into investments, and with compound interest and a decent return, you don't need to save anywhere close to 40%.

Possibly meaghanchan some of us aren't as behind as many calculators would have us believe, BUT, sayng that we aren't really behind is a pretty broad and sweeping statement. I'd agree that SOME people may not be as behind, but there are still plenty of people in the US (many women) who are not saving ANYTHING at all, and many truly are behind. I think it might do them a disservice to let them think that all the calculators are wrong and the numbers so fantastical that they'll never reach them and then they might give up.

We are as a nation BEHIND in the saving for retirement category. I think it is a very personal thing as well as much depends on the retirement lifestyle you hope to create for yourself.

I do believe that many calculators are created to line the pockets of those advisors who are putting them together. FEAR is a great motivator. But, OTOH, to let people mistakenly believe that their small savings will get them through so much so that they stop saving would also be a grave disaster, IMHO.

[Broken Arrow]

Originally Posted by LuxLiving

I don't believe enough people take into consideration how large a financial setback things like divorces and unnecesary moving around can make on their bottom lines.

Oh yeah, I almost forgot about that. Thanks for making me feel better!

[LuxLiving]

Sorry guy - wasn't trying to be insensitive.

I really do think lots of people, maybe your family and friends even, forget that divorce can put you almost back to square one financially. They forget that little magical phrase (if they ever even knew it) called 'opportunity cost'.

When most folks wake up from their advertising induced stupor they have some STUFF they can sell to reshuffle the hand that's already been played if they find that they're short on the net worth side. There is some sense of 'do overs' and maybe some assets that could be re-purposed into cash for investing.

However, in a divorce situation for males they often times walk away from a residence w/hat in hand and aren't so lucky as to walk w/any cash whatsoever. It really sucks sometimes. However, and on the other hand, many men have higher earning capacities and can make up for their losses quickly. When a woman divorces it can be costly for her as well, only she may be facing overcoming that hurdle w/decreased earnings.

Just the voice of experience speaking here.

[Broken Arrow]

Nono, I didn't think you were being insensitive. Quite the opposite, in fact.

[MonkeyMama]

Hmmm, interesting. Well looking at the income I would expect in 40 years and the forumla, the final results seems pretty accurate.

Looking on a year-by-year basis we have passed that by a mile some years or been far behind other years. Our income and situation has fulctuated widely in recent years. I am making almost twice as much this year as I did in 2005 so obviously I have not saved that much in the last couple of years. At the same token we made another $30k our first couple of years out of college so we built a good start and make way less now. Very random year to year here.

Our home equity blows it out of the water though - way ahead.

Doing the calc, our net worth should go up 21k this year - very reasonable. I expect our savings and retirement to grow about $20k-$30k. I think is another interesting way to look at it.

[Ima saver]

Well, I am doing ok with our net worth. I agree, a divorce can really put you behind. In my first husband's case, because I was the saver, he never recovered and never owned a house again.

[disneysteve]

I never said it was a good formula. Just one I'd never heard before.

I agree that it is probably more accurate the older you are and the longer you've been working. I'm 42 and working for over 13 years and I come out fairly close to what the formula says we should have. I'm quite sure I wouldn't have been anywhere near it 5 or 10 years ago when I was still buried in student loans.