Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

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Detroittl
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Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by Detroittl » Sun Dec 06, 2015 11:48 pm

Any general recomendations on reccomended total net worth needed at those ages if you plan to retire at 55?

I was at:

50 percent net worth of total salary at 30 (majority in tax deferred IRA)

135 percent at 35 (almost doubled salary towards 35 since 30 -- most in tax deferred, rest home equity and taxable).

Any GENERAL advice on milestones by age?

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Boglenaut
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by Boglenaut » Sun Dec 06, 2015 11:51 pm

Salary has nothing to do with it. It is how much you will be spending.

If you lost your job and got another one that paid half as much, are you instantly twice as ready to retire?

KlangFool
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by KlangFool » Sun Dec 06, 2015 11:54 pm

Detroittl wrote:Any general recomendations on reccomended total net worth needed at those ages if you plan to retire at 55?

I was at:

50 percent net worth of total salary at 30 (majority in tax deferred IRA)

135 percent at 35 (almost doubled salary towards 35 since 30 -- most in tax deferred, rest home equity and taxable).

Any GENERAL advice on milestones by age?
Detroittl,

I do not recommend people count their net worth based on income / salary. It should be based on your annual expense. If you want to retire on 55, your net worth should be 25 times to 40 times your annual expense by 55.

So, what is your number now??

KlangFool

Detroittl
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by Detroittl » Sun Dec 06, 2015 11:55 pm

Great point. I should have said assuming you want to spend based on current salary. I know none of this can be controlled. Just looking for a rule of thumb (if there is one). I have read articles from 1x to 2x at 30 etc.

All noise probably. I am thinking a 3 percent withdrawal rate at 55.

Detroittl
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by Detroittl » Sun Dec 06, 2015 11:58 pm

Assuming no more mortgage it would be 10x salary.

KlangFool
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by KlangFool » Mon Dec 07, 2015 12:00 am

Detroittl wrote:Great point. I should have said assuming you want to spend based on current salary. I know none of this can be controlled. Just looking for a rule of thumb (if there is one). I have read articles from 1x to 2x at 30 etc.

All noise probably. I am thinking a 3 percent withdrawal rate at 55.
Detroittl,

<<I should have said assuming you want to spend based on current salary. >>

Why?? You should be able to calculate your current expense..

Annual expense = Salary - Tax - Savings

We do not want to use your current salary. It is THE WRONG NUMBER. When you retire, you do not need to save money. So, why do you need you current salary?? Ditto, you may or may need to pay tax.

KlangFool

Detroittl
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by Detroittl » Mon Dec 07, 2015 12:03 am

Thanks. Yep I factored in about 25 times spending and I need about 10x CURRENT salary. I know its all about spending though :)

Taxes and pensions change that. So do health insurance needs and additions to the family etc. in flux... Thanks. Now I know my "current" number based on projected spending.

bonn
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by bonn » Mon Dec 07, 2015 12:07 am

First figure out how much you need to retire, e.g. if you assume a 3% withdrawal rate and think you need $X per year, then you need $X/0.03 saved. Then go find one of those compound interest calculators on Google, put in a reasonable assumption for return and put in how many years you have to go. That will tell you how much you should save per year to meet the goal if your assumption about return hold. If you expect your salary to increase significantly, it's probably OK to be a bit under that target. Don't forget to take inflation into account. Also, take taxes into account - the money you need is post-tax, savings in pre-tax accounts are, well, pre-tax, so you need to discount that for taxes.

This will give you a general idea of where you are. Don't expect reality to conform to whatever assumptions you are making, but at least this can tell you if it's plausible that you'll get to where you want to be.

The Wizard
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by The Wizard » Mon Dec 07, 2015 2:37 am

I saved about 30% of my gross income for retirement my last few working years.
I felt that having around 70% of that same gross income in retirement would comfortably exceed basic expenses and would make retirement and my Form 1040 seamless.

I had about 14 times my salary in tax deferred accounts. When divided by the .7 factor, this yields 20x.
This worked out OK for me...
Attempted new signature...

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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by Wagnerjb » Mon Dec 07, 2015 9:36 am

I don't know what the "right" answer is, but I will share my numbers:

At age 35, I had about 2x my salary in net worth (excluding home equity)

At age 40, I had about 6x

At age 45, I had about 10x

At age 50, I had about 20x

At age 55, I had about 25x


The increase from age 35 to 40 was primarily driven by a very strong stock market, combined with a 75-80% equity allocation. The jump between 45 and 50 was primarily due to the strong stock market, especially for my company's stock price - this helped my stock options and RSU's to blossom nicely. The jump between 50 and 55 was due to the value of my pension plan, being an old fashioned traditional plan that rewards long service and begins to ripen nicely beginning at age 50.

My salary climbed significantly during that time due to several promotions. I would guess it was 4x as high at age 55 as it was at age 35. By limiting the growth of my spending (thus saving more), I was able to keep the multiples moving up towards my goal of 25x.

Best wishes.
Andy

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CyberBob
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by CyberBob » Mon Dec 07, 2015 11:38 am

The book The Millionaire Next Door has a formula:
  • Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.
If your net worth equals the number from the above formula, you're an AAW, Average Accumulator of Wealth.

If it's only half that number, you're a UAW, Under Accumulator of Wealth.

If it's double, you're a PAW, Prodigious Accumulator of Wealth.

If you want to retire early, you probably must be a PAW.

http://www.savemillions.com/plan/expectnetworth.htm

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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by Bacchus01 » Mon Dec 07, 2015 1:04 pm

CyberBob wrote:The book The Millionaire Next Door has a formula:
  • Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.
If your net worth equals the number from the above formula, you're an AAW, Average Accumulator of Wealth.

If it's only half that number, you're a UAW, Under Accumulator of Wealth.

If it's double, you're a PAW, Prodigious Accumulator of Wealth.

If you want to retire early, you probably must be a PAW.

http://www.savemillions.com/plan/expectnetworth.htm

While the number is interesting, I'm not sure it's all that useful. Ironically, I did the math and am 3.7% above the number. Pretty darn close.

Looking at your income has very little bearing, as others have said. At 42 our net worth is roughly 4.4X my annual gross income. However, it's 14.6X our annual expenses. My goal to retire at 50 is to have 40X our annual expenses.

DVMResident
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by DVMResident » Mon Dec 07, 2015 1:42 pm

I like Wade's work on this topic:

Image

The way he presents the results provide can adjust for early retirement with shorter accumulation phases. While the chart doesn't give you benchmarks, it does provide very actionable target saving rates.

The book "Money Ratios" has a table of age-based bench marks for both retirement assets and debt ratios, including student loans and mortgages. It's an easy read and provides good ball park numbers, though the investment advice is superficial. The book is cheap and I picked up a copy off Amazon for $4.

KlangFool
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by KlangFool » Mon Dec 07, 2015 5:51 pm

DVMResident wrote:I like Wade's work on this topic:

Image

The way he presents the results provide can adjust for early retirement with shorter accumulation phases. While the chart doesn't give you benchmarks, it does provide very actionable target saving rates.

The book "Money Ratios" has a table of age-based bench marks for both retirement assets and debt ratios, including student loans and mortgages. It's an easy read and provides good ball park numbers, though the investment advice is superficial. The book is cheap and I picked up a copy off Amazon for $4.
DVMResident,

I do not think the table especially the portion about replacing 70% of final salary makes any sense. To replace 70% of the final salary, it means the annual expense is 70% of the final salary. Given that most of us pay 20% to 30% of our salary to tax like FICA, federal, and state income taxes, it means the person saves NOTHING. So, how could a person that saves NOTHING get to save enough money to replace 70% of final salary??

If we keep to annual expense as our main number, everything will work out better.

KlangFool

DVMResident
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by DVMResident » Mon Dec 07, 2015 6:16 pm

KlangFool wrote:
DVMResident wrote:I like Wade's work on this topic:

Image

The way he presents the results provide can adjust for early retirement with shorter accumulation phases. While the chart doesn't give you benchmarks, it does provide very actionable target saving rates.

The book "Money Ratios" has a table of age-based bench marks for both retirement assets and debt ratios, including student loans and mortgages. It's an easy read and provides good ball park numbers, though the investment advice is superficial. The book is cheap and I picked up a copy off Amazon for $4.
DVMResident,

I do not think the table especially the portion about replacing 70% of final salary makes any sense. To replace 70% of the final salary, it means the annual expense is 70% of the final salary. Given that most of us pay 20% to 30% of our salary to tax like FICA, federal, and state income taxes, it means the person saves NOTHING. So, how could a person that saves NOTHING get to save enough money to replace 70% of final salary??

If we keep to annual expense as our main number, everything will work out better.

KlangFool
Huh? You've misunderstood the chart. Here's a summary Wade Pfau's work if you want to read up.

Secondarily, an effective rate of 20~30% is much higher than average.

Not interested in derailing the thread.

KlangFool
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by KlangFool » Mon Dec 07, 2015 7:29 pm

DVMResident wrote:
Huh? You've misunderstood the chart. Here's a summary Wade Pfau's work if you want to read up.

Secondarily, an effective rate of 20~30% is much higher than average.

Not interested in derailing the thread.
DVMResident,

The average tax rate that you refer to only cover Federal Income Tax. We have to pay social security and medicare tax too. That is 7.65%. And, some of us has to pay a few percents on state income tax. So, if you add the average tax rate from your reference with those 2 taxes, it comes up to 20% to 30%.

If a person is paying 20% to 30% to tax, how could a person saves anything while spending 70% of their salary?? The number just do not add up.

KlangFool

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Artsdoctor
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by Artsdoctor » Tue Dec 08, 2015 7:35 pm

Calculating salaries is usually futile and misleading. If I used the Millionaire's calculator, it'd be ridiculous since my earnings now are designed to decrease each year as I cut back working more and more.

You need to understand what you're spending money on. By far, the most important calculation is going to be your list of expenses for many reasons (not the least of which might be a real eye-opener on useless things you're probably spending money on).
Last edited by Artsdoctor on Tue Dec 08, 2015 8:15 pm, edited 1 time in total.

letsgobobby
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Re: Net Worth -- Salary Ratio at age 30, 35, 40 if plan to retire at 55?

Post by letsgobobby » Tue Dec 08, 2015 8:00 pm

we can't even agree how much you need to retire at 55 (early)... how can we agree on 30, 35, 40?

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