For a childless person like me, it seems that the ideal net worth should be (my average spending rate per year) x (number of years left in my expected lifespan). I’m not in the mood to let distant relatives to whom I have no particular affinity, nor the government, divvy up my estate.
I’m married, with an ideal job that I plan to spend the next 15 year at, to retire around 62. I have a steady “emergency income” through a military retirement. We are debt free, with a a lot of my savings going into my 401k and savings.
My ideal income is to cover the bases for a simple, non-status lifestyle, with enough left over each year to do some travel to Europe and around the US. Right now my net worth is at my ideal amount, and I’m a good glide slope for retirement.
I’m happy driving a used truck, clipping coupons, drinking off-brand coffee, saving to cash-flow upgrades to an old duplex home, and living frugally. To use the words of one of my financial mentors, “I live like no-one else, so later I can live like no-one else.”
Tripler
It’s tough, but do-able. Baby steps, man . . . baby steps.
I read the book a few years ago and recall that the point of it was to demonstrate - on average - the ‘millionaire next door’ would have a 2x multiple of that formula, at least.
A modest but very useful inheritance a few years ago helped to more or less get rid of the mortgage, and house price increases where I live currently gets me to near the 2x level in those calculations.
However, that’s all heavily skewed toward a single, very illiquid asset, and if that’s excluded from the calculation, then the day to day situation looks quite different. Paying the credit card off each month is relatively easy when it’s just food and utilities, but there’s not a lot of slack for things like car repairs or home improvements. And that’s home-prepared meals - no dining out or takeaways.
The retirement savings are going well enough, but my country’s laws (NZ) don’t allow cashing out before 65, so again - I’m in an asset rich, cash ‘poor’ situation that doesn’t ‘feel’ much like a millionaire’s.
However, being able to live within one’s means is a very good place to be - and having some degree of certainty around it continuing past retirement is even better. I consider myself extremely fortunate.
That particular mentor is good for about three steps, after that you would do well to seek advice from others.
Basing ideal net worth on income makes no sense to me. I guess the idea is to set an attainable target, hence the age factor as well. This way young people and those with modest incomes can feel like they’re on the right track even if they haven’t saved much yet. But in terms of what a person needs, it just doesn’t track. A bigger salary, especially if you haven’t committed it all to a mortgage and other inflexible ongoing costs, means you can be more financially secure with less money saved than someone earning less.
The premise of the op has been corrected: such is not set up as ideal, just average or typical. No idea if even that is actually accurate.
The issue of what one ideally “should” have is something else. The authors seem though to start with the premise that the should is as much as possible.
Most of the financial advice I’ve seen (example here) prescribe wealth targets as a function of age and income. They make a lot of assumptions that may or may not apply in any individual case, such as:
- You will continue working at the same or larger salary until age 65.
- Your wealth is invested in a productive blend of stocks and bonds.
- You will continue to sock away X% of your pre-tax income every year until you retire (X is usually given as something like 15%).
- The market delivers reasonable rates of return between now and when you retire.
- You want to maintain your current lifestyle going into retirement, and therefore need your nest egg to provide XX% of your current income (XX is usually given as something like 75-80%)
- You won’t be receiving any kind of pension from your employer when you retire.
So any given household’s ideal (i.e. “adequate”) wealth target is going to differ from those generic recommendations depending on how much that household’s situation differs from those assumptions.
My wife and I are fortunate to have high incomes and limited spending habits (relative to that income). We buy nice stuff (vehicles, appliances, etc.) new, but we keep it a long time. As a result, we’ve saved a lot over the years; in our early 50s, we’re now well ahead of any of the generic targets I’ve seen for our age, including the OP’s Stanley and Danko scheme. Between that and a generous pension, we’ll be able to retire early and live very well after that.
It can be less than that because the money you have can earn you more money for the future.
But the OP’s formula doesn’t make young people feel like they are on the right track. It tells a 22 year-old with her first good job, making $75,000 per year, that she failing because she’s supposed to have $165,000 saved up, which is nonsense Perhaps there is some point in her career where the formula starts to be realistic but that won’t last long because it becomes meaningless again when people retire, get downsized, or change careers. The formula is a bit like BMI; maybe useful if you squint hard and look across broad populations but pretty useless for saying anything helpful about the individual in front of you.
Right. Of course, the irony is that we could say people who spend a lot less than they earn could make do with lower savings than the formula recommends but those are, of course, the people who are likely to have more savings.
Yeah, the Stanley/Danko scheme is a linear formula: target net worth is defined as being directly proportional to age. But that’s not how saving for retirement works. Generally speaking, the growth of a nest egg is fairly linear when you start your career, because your deposits vastly outstrip the growth due to dividends and share price increase. Along the way, your salary typically increases due to inflation (and hopefully also due to various promotions), so your nest egg grows a bit faster in the middle. As you get closer to retirement, the annual increase in share price & dividends likely becomes much larger than your deposits, leading to exponential growth. A linear formula like Stanley/Danko, if it gives good results in middle/old age, is definitely going to suggest too high a target for people at the start of their career. .
I selected that I was under funded but I forgot about my retirement income. It’s a true retirement annuity - it pays me until I pass away and then if my wife survives she gets 55% until she dies. The payments go up with inflation each year. I have no idea how that figures into this formula.
It also makes no sense for retired people. It goes up with age, while what you need goes down because you have fewer years to survive. Actually, my wife and I are spending less than our retirement income. It will eventually go to the kids.
Another thing that doesn’t really work with this calculation is the failure to consider liquid assets vs. investments. Long-term financial security is often best promoted by buying real estate and/or investing in stocks, especially in a retirement account. But medium-term financial security features requires some savings that are immediately accessible in case of job loss or other emergency. Such emergency funds won’t grow as much as they could, but there has to be some balance. Looking only at the total amount can give you a very incomplete picture of a person’s financial health. If all your money is tied up in your house, you may have a great net worth on paper, but you could be a hair’s breadth from ruin. Conversely, if you have all your money in a checking account, even if you have a lot, your long-term picture may not be so rosy.
My husband and I just bought a house a month ago, and the estimated value has already shot up to over $100k more than what we paid. Hooray! We won the money game! Except, it’s not like we can live off those gains if one of us loses our job. We would have to sell the house to get that money, and then we’d need another place to live, and it’s the entire housing market that’s going nuts so it’s not like we could just buy another house for the price we paid for this one. On paper our net worth looks pretty good, but in reality we’re holding our breath that nothing goes wrong. But on the flip side, if the housing market crashed and the value of our house dropped below what we paid, it wouldn’t really matter. The mortgage is what it is; we’re just going to keep plugging away at it.
I’d like to hear more of your opinion. What makes you say that?
Tripler
Seeking advice from others.
Recent Schwab survey among Americans say that to be considered wealthy you need a net worth of at least $1.9 million. Down from $2.6 million in a 2020 survey.
"Here’s the net worth each generation says you need to be considered wealthy in 2021:
- Millennials (ages 24 to 39): $1.4 million
- Gen X (ages 44 to 55): $1.9 million
- Baby boomers (ages 56 to 74): $2.5 million"
Below. I have a roughly 25% savings rate, but I’ve only had a good job for seven years and only had such a good savings rate for that period of time.
I thought I had caught up, but I only reach half the OP’s net worth values.
Hey all, are there any rec’s for a good retirement calculator? One that is in depth that has many inputs and creates a financial model going into retirement? I’m imagining something like turbotax but haven’t found one yet. TIA
Let me first start by saying that your mentor is very good at the first three baby steps. That’s his wheelhouse, and while it may be tough to actually follow, it’s certainly not impossible. Full credit to him for his work in helping people in that area.
Once you are out of that hole, once you are finished with step three, in my opinion he starts to get into areas where he simply does not give the best advice, and worse, his arrogance seems to prevent him from recognizing (or correcting) his ineptitude in this area. Listen to him long enough and you will eventually hear him on one of his rants where he tries to defend his ignorance. On one level, I get it – his audience is varied but generally on the low information side when it comes to financial knowledge (there are literally people who call in with a question which is essentially “I have some money, I have some debt – What should I do?”). Nothing against these people – they need help, and he helps them.
His investment advice for his listeners who still listen to him after completing the first three steps – is it bad? No, but it certainly isn’t the best - he suggests that you go to one of his affiliated investment professionals, where he presumable gets a referral fee or some other compensation, and the advisor sells load funds with high expense ratios. He argues that people paying both loads and high expense ratios are doing better than people who don’t get to the point of investing at all, and that’s correct, but it ignores that paying the loads and higher expense ratios are less than optimum for the investor. He could change the way he teaches, he could do better, but he chooses not to. That’s why I suggest that at this point you look elsewhere for information. If you don’t and only rely on him for information, you won’t notice when he gives out poor advice, which I believe he does on occasion. He probably won’t point it out or admit to it, so it’s up to the listener to be smart enough to recognize it.
I’ll suggest a few sources. It’s certainly not a comprehensive list, but it’s a starting point if you want to expand your understanding of financial education.
First, listen to episodes 234 and 243 at The Dough Roller This demonstrates that fees really do matter. Other than these two, these are many good podcasts in general here.
Another podcast that is interesting is Ric Edelman’s “The Truth about Money”. He is an investment advisor, and is good at understanding the entire circumstances of a caller’s situation. Disclosure: I had a financial review performed by his firm, agreed with most of his analysis and advice, and still chose not to do business with him. But the podcast is good.
Other good sources can be found at the Bogleheads forum, the Mr. Money Moustache forum, and reading Michael Kitces (note that he writes for financial advisors, not for the layman, but he’s very good). The two forums mentioned have very different board cultures, yet both are good for reading about differing points of view on financial matters.
That’s a starting point, no doubt that there are many other sources of information, and no doubt that others may find fault with my recommendations. No matter – the more you do to educate yourself the better off you will be.
You’re doing great. Keep at it and don’t worry about what this one-size-fits-all formula says.
@Tripler and @Dag_Otto, you both seem to be having a side conversation about Dave Ramsay, if ten seconds of googling gives me the right idea. I don’t know much about him though I’ve heard of the idea of paying off small debts first. While that advice isn’t perfectly rational, it seems to give people a sense of progress and keeps them committed to paying off debt, so it works for many people.
However, after looking at his website, my spidey sense is triggered at step 4 of his program where he refers people to investment advisers. Without giving him my personal information and inviting piles of spam, I can’t investigate further but I suspect that many people are buying higher cost investments through his website when they would be getter served with low-cost index funds or ETFs. It doesn’t take a financial genius to do a decent job of investing your own portfolio. Most people, IMHO, would be better off if they learned the basics about investing and took matters into their own hands. I recognize that not everyone has the ability or commitment to do this and that some advisers give holistic advice that means they earn their compensation but…
Individuals have a lot of margin to make small mistakes in timing or asset allocation decisions when compared to “ideal” professional advice and still come out ahead of the pros when fees are taken into account. And when you consider that most pros don’t give even theoretically perfect advice, it’s even easier to beat them.
I keep thinking about this. A person with no income would have an ideal net worth of zero. You suckers keep on toiling for the man; I’m outta here!
I just did it for my 9-year-old self.
Yeah, $52 sounds about right.