I just copied a formula that I think makes more sense than the one from Millionaire Next Door. It still has a few shortcomings, primary one is that it does not take inflation into account. It needs tuning but could definitely serve as a good start.
To answer your questions,
1. You should only use the amount that could be coverted into retirement funds when needed. So even if you have taxable accounts, as long as you can use the money for retirement, count it as your retirement savings.
2. Yes, annual spending does not include annual savings.
3. I think the saying makes sense only in average return sense, but since an investment-grade asset always produces fluctuating returns, it makes the saying useless. I would change the rule such that using a hypothetic 6% return on your existing networths, it should yield a similar amount of savings compared with your real savings from the salary.
[quote=Fletch]Thanks for the explanation, Carlsbad.
Can you tell me:
– only half of my net worth is retirement. I have a bunch in 529s and some in other non-retirment investments. Shouldn’t I only divide my retirement savings by annual spending?
– About that “annual spending”: this should not include any annual savings (again, 529s and non 401k monthly investments), right?
– Are you really saying that when I’m 40, my retirement investments should be yielding 50% of my annual spending?[/quote]
