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Networth to Age : How do you figure how you are doing?

Posted by gandlaf77 on 11/8/2010 at 8:30 AM | 16 answers | 2904 views
Esteemed friends...I am grappling with a question that I cant get a good answer to even after googling it. How do I know if I am doing well with my networth relative to:

1. My age : 33 (wife is 31)
2. My goals (Retire as early as possible)
3. My savings ratio (about 30% of salary per year). Should I up this if I am not on track for #2?

My networth is public in my profile if you would like to take a look.

How do YOU measure whether you are on track? Do you know of any tools/rules of thumb that apply?

Thanks!

Answers

This is a nice summary of the "Millionaire Next Door" including the formula for determining whether you are underaccumulating, whether you're average or prodigious.

http://www.travismorien.com/FAQ/thrift/millionaire.htm
Good link. Is it really achievable? My issue is that my salary spiked in the middle and almost doubled. Hence I am below the "prodiguous" level since I didnt have the high salary I make today for most of my life.
I googled and found this from a fellow NWIQ user:

http://pfodyssey.wordpress.com/2007/04/25/net-worth-how-am-i-doing/
I struggle with the Millionaire Nextdoor formula. I think it works rather well for the dataset they had, which was those who had already achieved wealth, and were typically in older demographics. Its linear relationship with age seems rather flawed to me, due to the number of years for which no income, or very limited income is available. In other words, it is too hard a scale when you are young, and too easy a scale when you are older.

I run my own version of this based on starting the age at 18 (assuming finishing highschool, but that university/college is a trade-off between education (investment in yourself), or income (work, and invest the $ in the financial markets). I've increased the slope accordingly, based upon a (guessed) median age of the millionaire next door sample age of 50. If anyone has a better number on this, let me know!
I go to the "explore" tab on this website. Then select my age range and download everyone in my age(25-29) AND income (70-80k) range into an excel spreadsheet. There are about 70 names in that range. I list them all according to networth and see where I come in line, and try to move up the list. Median NW is $78,962 for a 25-29 year old making $70-80k.

Now that being said. This site probably has people on it who are lifetime savers rather than big spenders, but it gives me a nice challenge anyway. Right now I am in 23rd place.
1. You could get an idea with the Age comparison in the comparison report. Don't know if this will be helpful to you though.

2 & 3. This is actually tougher to answer if you haven't defined either what "age" you plan on retiring or what level of income or wealth you expect to have when you chose to "retire". Are you looking at 40, 50, or 60 years old as early?

You only really know if you are doing well if you've defined what it is you are attempting to accomplish and measure against that. If it's growing your networth 20% a year it's one thing. If it's comparing to people who stopped working an income producing job at 60, or 50, or 40, that's another. If it's to have three million in today's dollars that's another.

I use a percentage of my current income as what I will need to bring in after I stop working 9-5, project my current and planned savings, then play with things like the MSN retirement planner or firecalc to give me an idea if I'm off base.
Good suggestions. I would like to be able to retire at 50 if possible. But I think thats tough. This site probably does have top savers. I am doing ok in the comparison report (not great). Above average, but not in the top 10.

What I have read is that you need 4Mill to be able to make 80000 per year at retirement. Not sure how that math works. But 4Mill is far far away :(
Well, if you have $4,000,000, you only need 2% interest to make $80,000. I think a nicely balanced portfolio should be able to earn over 2% per year. I think 3-4% is not out of reach, and at 4% interest you only need $2,000,000 to earn $80,000 in interest.

I think where ever you read the $4 million number they were being a little too conservative, like a 100% cash allocation. You always need to keep some stock allocation to keep up with inflation, no matter how old you are.
The use of $4M as a goal is fine, never hurts to have extra. But keep in mind that is meant to assume you never touch the principal, that you funnel extra interest into the account to keep up with inflation, and that you live forever or are dead set on providing all that money inflation adjusted for your heirs when you pass away (at 100 how old will your heirs be and will they need the money?). Assuming you make 6% on the money, so you're earning 3% over a an assumed 3% inflation rate, and taking that 3% as 80K inflation adjusted out a year for 50 years, you should be able to get buy with $2M, and run out of money at 100 years old.

15 years of $50K a year saved at 2% above inflation a year is about $865K, plus the $500K (assets besides your current home) you potentially have now at 2% will give you about $1.5M. You could up your savings and adjust that, or lower your expected needs, or increase your salary more to make your goals at 50.

Besides, just because you "retire" at 50 doesn't mean you stop working at things you like which can also bring in some money. You're spouse may decide to put in a few more years, etc. Lots of options.
Getagrip - thats some good math you just did there. Appreciate the guidance. MDV - I am not sure what the assumptions around the numbers were to tell you the truth. I always thought about 2 mill was sufficient as well.

Maybe another way to look at retirement could be that if I have 1 Mill in net worth, then moving to India and settling for a lower cost lifestyle might not be a bad idea too (I have that option).
http://cgi.money.cnn.com/tools/networth_ageincome/index.html
gandlaf,
you are MILES ahead of where you should be at your age, even with your stellar income. keep doing what your doing, if you continue to save at your current 30% clip, your going to have about 4.5 million in cash by the time your 50 years old. you read exactly like the millionaires in tom stanley's book- invested early and often, carried very little debt, and lived in a house well below their means.....your a rockstar keep it up!
Would love to retire early as well... but more importantly I am seeking Financial Independance. Once I acheive this I can retire, work part time, find a job that I enjoy even if it pays less, or even continue to work full time to fund a higher retirement lifestyle down the road. FI is all about flexibility.
DrPepper - I have already seen that tool. I feel it is quite limited. Dont you?

Hoosier - Wow. Thanks for the comments. I hope you are right. You seem to be doing pretty well too! Good work. (I saw your profile, sorry)

Jon - Exactly what I have in mind.
I retired at 44. That doesn't mean I know anything except what works for me. I have a few thought that may help.
Figure out how much income you need to retire. There are two sides to that. Both the income you need and what it costs to live in your ideal retirement must be figured out. What it will cost to live seems to be the most neglected part of figuring out your retirement needs. You can retire on almost nothing if you live at home with you mom and walk everywhere. I buy used cars and motorcycles instead of new and travel off season. Both save me a lot of money with little or no difference in what you get. Those two things will save me around $100,000 over a lifetime. Whatever retirement number you figure is enough, figure 20% more.
Loner - I am super impressed. I saw your profile and you are an inspiration! Did you really get their by saving alone? Did you do something different?

How did you figure your retirement? Do you see your 2.5Mill holding up for the rest of your timeline?

Would you like to answer?

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