“Ideal networth formula”

[carlsbadworker]

The most important use of a net worth statement is to measure your progress toward retirement. In order to retire at age 72 and have sufficient funds to maintain your standard of living you need about twenty times your annual spending.

Take your net worth and divide by your annual take home pay. This is how many times your annual standard of living you have amassed in savings. If you are under 40, the number is probably less than five. That’s ok; it is supposed to be.

Progress toward retirement is not a linear function. To those of you wondering if the math you studied in high school is useful, the following equation was determined by quadratic regression. It estimates how much of your current net worth you should have saved given your age. This gives you a benchmark for determining if you are on track to retire by age 72.

Take your age and divide by 166. Then subtract fifteen hundredths (0.15). Finally, multiply the result by your age. The resulting number should be between zero and twenty. That number is how many times your current annual income you should be worth.

Pull out your calculator and follow an example. If you are 45 years old then forty-five divided by 166 equals 0.2711. Subtract 0.15 to get 0.1211. Then multiply by 45 again. The result is 5.45. By age forty-five you should be worth about five and a half times your annual spending. More sophisticated retirement planning includes the difference between taxable, tax deferred and Roth accounts as well as Social Security guesses and defined benefit plans, but this is a good approximation of your progress. Here is a table that shows by what age you should have saved different multiples of your annual spending.

Age Annual_Spending_Saved
30 1
35 2
38 3
42 4
44 5
47 6
49 7
51 8
53 9
55 10
57 11
59 12
61 13
63 14
64 15
66 16
68 17
69 18
70 19
72 20

If your net worth is a higher: Congratulations! You are on the path to retiring earlier than 72! For every 0.5 you are over, you could consider retiring about a year earlier. Conversely, for every 0.5 you are under your age’s benchmark you may have to work an additional year beyond 72.

Between the ages of 40 and 60 your net worth should increase by one unit of your annual spending every two years. That means that your current net worth divided by your take home pay should be one unit greater than it was two years ago. Alternately, if you are between 40 and 60, your net worth should have increased this year by half of your take home pay.

This is because money makes money, and by the time you are in your 40’s you should have enough investments to be earning about half of your annual spending each year. The compounded growth of your investments does the lion’s share of the work while you only need to contribute 15% of your current earnings. If you save 15% of your take home pay between age 20 and age 72 you should have sufficient savings in retirement. This is despite the fact that you will have saved less than 7 years worth of pay and many of those years will have been at a lower rate of pay. How much you save and invest is the primary determination of your financial future.

Want to retire younger? Try lowering your standard of living. In retirement, most people spend about 70% of the gross salary they earned while they were working. If you can live off 50% of your take home pay, you don’t need as much savings to maintain that lower lifestyle.

Need to catch up? Save more than the 15% of your take home pay. Determine how far you are behind and what additional percentage you can save each year. For example, at age 30 you should be worth 1.4 times your annual income. What should you do if you are only worth 1.1 times your annual income? Normally, to stay on track you need to save 15% of your income each year. In order to catch up you need an additional 0.3 times your annual income. One option would be to save an additional 10% of your income for three years. If saving 25% of your income is too much, try saving 20% (an additional 5%) for six years.

http://www.emarotta.com/article.php?ID=165

[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?

[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?

[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?

[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?

[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?

[Anonymous]

[quote=Fletch]- Are you really saying that when I’m 40, my retirement investments should be yielding 50% of my annual spending?[/quote]

I read that to mean that your savings+investment returns should increase your net worth by 50% of your pay. Of course investment returns will vary year to year, but this is a good target.

[Anonymous]

[quote=Fletch]- Are you really saying that when I’m 40, my retirement investments should be yielding 50% of my annual spending?[/quote]

I read that to mean that your savings+investment returns should increase your net worth by 50% of your pay. Of course investment returns will vary year to year, but this is a good target.

[Anonymous]

[quote=Fletch]- Are you really saying that when I’m 40, my retirement investments should be yielding 50% of my annual spending?[/quote]

I read that to mean that your savings+investment returns should increase your net worth by 50% of your pay. Of course investment returns will vary year to year, but this is a good target.

[Anonymous]

[quote=Fletch]- Are you really saying that when I’m 40, my retirement investments should be yielding 50% of my annual spending?[/quote]

I read that to mean that your savings+investment returns should increase your net worth by 50% of your pay. Of course investment returns will vary year to year, but this is a good target.

[Anonymous]

[quote=Fletch]- Are you really saying that when I’m 40, my retirement investments should be yielding 50% of my annual spending?[/quote]

I read that to mean that your savings+investment returns should increase your net worth by 50% of your pay. Of course investment returns will vary year to year, but this is a good target.

[Anonymous]

The version of Quicken I have has a pretty good retirement calculator tool that allows you to include life’s “financial events” such as kid’s college education, selling your home, etc. The tool certainly is pretty comprehensive, but it’s hard to know if it’s correct. (I guess I’ll find out a few decades from now…)

I don’t remember which versions of Quicken has this tool – I think you have to get “deluxe” or something like that. If you care about when you can retire and use Quicken, it’s probably worth the $30 bucks or so in additional cost. I find that it is useful to change parameters and “run scenarios” as you will learn that some factors matter much more than others.

And, no, I don’t work for Intuit 😉

[Anonymous]

The version of Quicken I have has a pretty good retirement calculator tool that allows you to include life’s “financial events” such as kid’s college education, selling your home, etc. The tool certainly is pretty comprehensive, but it’s hard to know if it’s correct. (I guess I’ll find out a few decades from now…)

I don’t remember which versions of Quicken has this tool – I think you have to get “deluxe” or something like that. If you care about when you can retire and use Quicken, it’s probably worth the $30 bucks or so in additional cost. I find that it is useful to change parameters and “run scenarios” as you will learn that some factors matter much more than others.

And, no, I don’t work for Intuit 😉

[Anonymous]

The version of Quicken I have has a pretty good retirement calculator tool that allows you to include life’s “financial events” such as kid’s college education, selling your home, etc. The tool certainly is pretty comprehensive, but it’s hard to know if it’s correct. (I guess I’ll find out a few decades from now…)

I don’t remember which versions of Quicken has this tool – I think you have to get “deluxe” or something like that. If you care about when you can retire and use Quicken, it’s probably worth the $30 bucks or so in additional cost. I find that it is useful to change parameters and “run scenarios” as you will learn that some factors matter much more than others.

And, no, I don’t work for Intuit 😉

[Anonymous]

The version of Quicken I have has a pretty good retirement calculator tool that allows you to include life’s “financial events” such as kid’s college education, selling your home, etc. The tool certainly is pretty comprehensive, but it’s hard to know if it’s correct. (I guess I’ll find out a few decades from now…)

I don’t remember which versions of Quicken has this tool – I think you have to get “deluxe” or something like that. If you care about when you can retire and use Quicken, it’s probably worth the $30 bucks or so in additional cost. I find that it is useful to change parameters and “run scenarios” as you will learn that some factors matter much more than others.

And, no, I don’t work for Intuit 😉

[Author]

Posts