Networth = Age x Pretax income then divide by 10?

Gambler · Post by **Gambler** » Thu Jul 14, 2016 3:20 pm

From:
http://www.getrichslowly.org/blog/2011/ ... next-door/

"Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be."

( it’s more accurate for people who are at least a couple of decades into their careers. )

so i meet the author's definition of suggested networth.
But what does it mean?

Nowizard · Post by **Nowizard** » Thu Jul 14, 2016 3:25 pm

It means that someone has a new formula that is meaningless in an individual sense, in my opinion. Net worth is a measure of income vs. outgo and investment return, but is it more than that? It does not seem to apply at all in our case.

Tim

Jack FFR1846 · Post by **Jack FFR1846** » Thu Jul 14, 2016 3:26 pm

Silly.

I'm at well over double their number (when combined with my wife) and still don't meet the 4% rule yet. Of course I could use the Fidelity numbers and retire comfortably right now. I'm a safety net guy. If there's any chance for failure, I'm still saving and not retiring.

Dutch · Post by **Dutch** » Thu Jul 14, 2016 3:30 pm

In any such formula there must be an (implied) assumption about retirement age.

If you're shooting for early retirement, you should probably be ahead of this number.

lotusflower · Post by **lotusflower** » Thu Jul 14, 2016 3:31 pm

Gambler wrote:From:
But what does it mean?

Well you can start by rearranging the math: Divide your age by 10; multiply that times your gross household income, and that should be your net worth target. So as you get older, not only will your income go up, but you should be accumulating savings so the ratio of net worth to income also rises.

In other words, "Save, and then save some more!"

alpenglow · Post by **alpenglow** » Thu Jul 14, 2016 3:36 pm

I'm a 2.5X this suggested value at age 40-ish.

TomatoTomahto · Post by **TomatoTomahto** » Thu Jul 14, 2016 3:39 pm

We were fine. Then my wife got a big raise last year. Now we're bums again.

How silly.

ETA: actually, we are close. Still silly. We were killing it before her raise

MrNewEngland · Post by **MrNewEngland** » Thu Jul 14, 2016 3:39 pm

Seems unreasonable when you're young... a 25 year old making $50k having a net worth of $125k would be outstanding, and too conservative when you're old... a 60 year old making $100k should be worth more than $600k if he wants to retire with more than 24% of his income.

Post by **oldcomputerguy** » Thu Jul 14, 2016 3:41 pm

Gambler wrote:From:
http://www.getrichslowly.org/blog/2011/ ... next-door/

"Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be."

( it’s more accurate for people who are at least a couple of decades into their careers. )

so i meet the author's definition of suggested networth.
But what does it mean?

Nothing. Someone else's calculation of what your net worth "should be" doesn't take into account your individual circumstances. And even if it did, so what? What "should" your net worth be? Are you really inclined to benchmark your life and personal financial picture against what a stranger says it "should be"?

VGisforme · Post by **VGisforme** » Thu Jul 14, 2016 3:44 pm

Most early replies seem to think this has something to do with a retirement goal... This is simply a net worth rule of thumb it says nothing about your suitability to retire which is more a function of assets, spending and time horizon.

I suppose that might shame some folks if their networth is lower but as with all rules of thumb it won't work for all individuals. What about the young doctor just starting residency, or the 45 year old factory worker who has been at it since 18?

NightFall · Post by **NightFall** » Thu Jul 14, 2016 3:52 pm

Gambler wrote: "Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be."

This formula is from The Millionaire Next Door and is the definition of a Prodigious Accumulator of Wealth. See https://en.wikipedia.org/wiki/The_Millionaire_Next_Door. There have been lots of discussions about the merits of this formula.

JoMoney · Post by **JoMoney** » Thu Jul 14, 2016 3:52 pm

Meh...

https://en.wikipedia.org/wiki/The_Milli ... ersus_PAWs
...This metric has been criticized since, for example, a 20-year-old making $50k a year should have a net worth of $100k to be considered an "average accumulator of wealth". That makes little sense since it would take a new graduate years of strong savings and investments to accumulate that amount. The formula fails to take into account compounding interest; younger people up to age 45 or so will generally have much less as a percentage of income than older wealth accumulators due to compounded growth.

I think the info gathered in the book is interesting, and the UAW/PAW methodology makes what I think could be a reasonable long-term target for people who like to have something to aim at, but it's not a perfect formula... there will be plenty of situations that don't fit the norm.

DVMResident · Post by **DVMResident** » Thu Jul 14, 2016 4:34 pm

It's silly. A MD who goes from a resident to an attending is a worse saver because her income tripled overnight? Huh?
Lots of events will cause income to swing wildly: spouse transitioning to stay-at-home, promotions, commissions/sales, career changes, etc.

Spending:savings rate is a much better measure than income.

While we're at it, net worth is not particularly meaningful either. Many people for example have the bulk of their net worth tied in their house and car, but, as other's have put it on this forum, "you can not eat your house." Meeting your expenditures is the real measure of FI, i.e. retirement.

delamer · Post by **delamer** » Thu Jul 14, 2016 4:44 pm

JoMoney wrote:Meh...
https://en.wikipedia.org/wiki/The_Milli ... ersus_PAWs
...This metric has been criticized since, for example, a 20-year-old making $50k a year should have a net worth of $100k to be considered an "average accumulator of wealth". That makes little sense since it would take a new graduate years of strong savings and investments to accumulate that amount. The formula fails to take into account compounding interest; younger people up to age 45 or so will generally have much less as a percentage of income than older wealth accumulators due to compounded growth.
I think the info gathered in the book is interesting, and the UAW/PAW methodology makes what I think could be a reasonable long-term target for people who like to have something to aim at, but it's not a perfect formula... there will be plenty of situations that don't fit the norm.

Agreed. For instance, frequently personal finance columnists/articles/websites (including posters on this forum) ignore the fact that many people have traditional defined benefit pensions, and so their need for savings is not as high as those without pensions (all other things being equal).

Dutch · Post by **Dutch** » Thu Jul 14, 2016 5:00 pm

VGisforme wrote:Most early replies seem to think this has something to do with a retirement goal... This is simply a net worth rule of thumb it says nothing about your suitability to retire which is more a function of assets, spending and time horizon.

Of course this has something - if not everything - to do with a retirement goal

GMan82 · Post by **GMan82** » Thu Jul 14, 2016 5:23 pm

So EmergDoc (White Coat Investor) has a good rule of thumb directed at physician.

Expected Net Worth of a Doctor (ENWD) = Average Post-Residency Income X Years Since Training X 0.25

That rule is a bit more palatable for those of us who spent a long time in Med school and residency and fellowship. Per that rule, my ENW would be roughly $68k about now. I'm actually about -$70k at the moment, which is way better than the original -$165k I was when I started my first attending job 11 months ago.

Going by the rule from the OP, I'm supposed to be worth about $1m right now. Far from that!!! So far!

goodenyou · Post by **goodenyou** » Thu Jul 14, 2016 9:24 pm

GMan82 wrote:So EmergDoc (White Coat Investor) has a good rule of thumb directed at physician.

Expected Net Worth of a Doctor (ENWD) = Average Post-Residency Income X Years Since Training X 0.25

That rule is a bit more palatable for those of us who spent a long time in Med school and residency and fellowship. Per that rule, my ENW would be roughly $68k about now. I'm actually about -$70k at the moment, which is way better than the original -$165k I was when I started my first attending job 11 months ago.

Going by the rule from the OP, I'm supposed to be worth about $1m right now. Far from that!!! So far!

That formula seems to estimate a low net worth. If you had a post residency average of $500,000 x 20 years= $10M x .25=$2.5M. $2.5M for 20 years of $500,000/year should be very low, unless you are high spender. I would imagine the formula breaks down at extremes.

BanditKing · Post by **BanditKing** » Thu Jul 14, 2016 9:40 pm

It's a "fun" formula, but I think is really geared toward average-income people.

Personally, I got a late start investing, so I end up at around 74% of my "target number" (age 45, income $150k). Plus, a good chunk of my net worth isn't even close to being liquid - being a condo, land, and vehicles.

GMan82 · Post by **GMan82** » Thu Jul 14, 2016 9:44 pm

That formula seems to estimate a low net worth. If you had a post residency average of $500,000 x 20 years= $10M x .25=$2.5M. $2.5M for 20 years of $500,000/year should be very low, unless you are high spender. I would imagine the formula breaks down at extremes.

I think it's meant to be a benchmark, with the same assumptions then for under accumulator and prodigious accumulator.

Here's the link to part 2 of his explanation.

http://whitecoatinvestor.com/the-physic ... le-part-2/

VGisforme · Post by **VGisforme** » Thu Jul 14, 2016 11:17 pm

Dutch wrote:
VGisforme wrote:Most early replies seem to think this has something to do with a retirement goal... This is simply a net worth rule of thumb it says nothing about your suitability to retire which is more a function of assets, spending and time horizon.
Of course this has something - if not everything - to do with a retirement goal

Net worth by itself tells you nothing about your suitability for retirement. This rule of thumb tells you if you have an "appropriate" net worth.

Of course your individualized net worth goal is important as you've based it on the appropriate spending pattern and time horizon for your situation but that has nothing to do with some arbitrary rule of thumb.

In other words this formula isn't telling you that you can retire if you meet or exceed, it is only meant as a gague of where you are at in relation to where you should be at a given age and income level. Just like the concept you should have 1x income by age X and 5x income by age X etc. that's somewhat helpful but overly broad and not applicable to all scenarios.

EddyB · Post by **EddyB** » Thu Jul 14, 2016 11:28 pm

alpenglow wrote:I'm a 2.5X this suggested value at age 40-ish.

I was close to that just before I turned 40 last year, but then I got a big raise, so now I'm much worse off ....

alpenglow · Post by **alpenglow** » Fri Jul 15, 2016 5:41 am

EddyB wrote:I was close to that just before I turned 40 last year, but then I got a big raise, so now I'm much worse off ....

I'm embarrassed for you.

SQRT · Post by **SQRT** » Fri Jul 15, 2016 6:56 am

The number would generally be higher for a retired person, ie my number is about 5x the bench mark. Aged 66 retired 10 years.

just frank · Post by **just frank** » Fri Jul 15, 2016 7:13 am

Our family NetWorth is 4.0 X Adjusted Gross Income. And my wife and my mean age is 50.

I guess we're running a little behind....which jibes with my feelings on the subject, so the proposed formula seems more or less ok.

Rainmaker41 · Post by **Rainmaker41** » Fri Jul 15, 2016 8:33 am

I'm at about 1/4 of that, although I *am* only 25. I roughly expect the trend to be for my net worth to gradually approach that suggested figure over the next decade... until a mortgage is opened up toward the end of that period anyway. Even that probably isn't representative of my generation given the prevalence of educational debt.

On the other hand, as a rough target for total retirement assets with paid off mortgage upon retirement age that calculation seems entirely reasonable to me.

BW1985 · Post by **BW1985** » Fri Jul 15, 2016 9:25 am

saladdin wrote:
Dutch wrote:
VGisforme wrote:Most early replies seem to think this has something to do with a retirement goal... This is simply a net worth rule of thumb it says nothing about your suitability to retire which is more a function of assets, spending and time horizon.
Of course this has something - if not everything - to do with a retirement goal
Net worth is utterly meaningless. I'll be glad when others realize this and stop using such a silly thing.

I suppose if one has a combination of SS, pension & annuities that do or will make them financially independent than net worth doesn't mean a whole lot to them. But for everyone else, net worth is very meaningful.

megaroth · Post by **megaroth** » Fri Jul 15, 2016 2:49 pm

I find it more meaningful to track progress in terms of "X years of annual household expenses saved" because that's ultimately what I'm going to have to cover: X years of retirement. You can choose to include or exclude Social Security, pensions, etc. according to your level of confidence that those sources will be 100% funded and available to you during your retirement.

wfrobinette · Post by **wfrobinette** » Thu Jul 21, 2016 2:45 pm

Gambler wrote:From:
http://www.getrichslowly.org/blog/2011/ ... next-door/

"Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be."

( it’s more accurate for people who are at least a couple of decades into their careers. )

so i meet the author's definition of suggested networth.
But what does it mean?

so i meet the author's definition of suggested networth.
But what does it mean?[/quote]

I read this book.

This is not suggesting what you need for retirement. I can't remember the the exact terms he used but the following describes it.

The author states that if you saved less than this amount you're a spender, more your a saver.

fpr4 · Post by **fpr4** » Thu Jul 21, 2016 3:32 pm

Do a lot of 33 y/o have a $250k NW? If so, FML.

Durzo · Post by **Durzo** » Thu Jul 21, 2016 3:39 pm

Damn, if anyone knows a 23 year old that has saved 2.3 times their salary please let them know i'm single at the moment.

michaeljc70 · Post by **michaeljc70** » Thu Jul 21, 2016 3:45 pm

If you've been working for decades, just the thought of coming up with an average of 20 or 30 years of income is a lot of work. Do you do that in today's dollars?

I have more than double what it says I should have, but have no idea what that means really.

I think it is a silly measure. A couple things are it doesn't take into account when you want to retire or how much you will spend in retirement.

JDCarpenter · Post by **JDCarpenter** » Thu Jul 21, 2016 4:30 pm

Strikes me as a rule of thumb akin to the frequently touted "80% of pre-retirement income."

At retirement (57/56 years old), we will fall miserably short of the 80% in spending, but handily beat this formula. In our case, they don't mean much.

May be useful for someone who is just starting to look at finances...

JamesSFO · Post by **JamesSFO** » Thu Jul 21, 2016 4:37 pm

I like these sorts of rules of thumb (much like "Your Money Ratios" book) to help get some calibration on how you are doing.

The Your Money Ratios version is nice in that it is linked to 80% income replacement at age 65 with different multipliers for ages 20-65:

Code: Select all

Age	Capital to Income (CIR)
25	0.10
30	0.60
35	1.40
40	2.40
45	3.70
50	5.20
55	7.10
60	9.40
65	12.00

Traveler · Post by **Traveler** » Thu Jul 21, 2016 6:52 pm

It's right on for me (age 44), but it probably doesn't work too well for a younger person. Nor for someone who just increased their income drastically.

JamesSFO · Post by **JamesSFO** » Thu Jul 21, 2016 8:58 pm

Traveler wrote:It's right on for me (age 44), but it probably doesn't work too well for a younger person. Nor for someone who just increased their income drastically.

That's why I like the Your Money Ratios version which is more age sensitive.

Solair of Astora · Post by **Solair of Astora** » Fri Jul 22, 2016 9:15 am

Durzo wrote:Damn, if anyone knows a 23 year old that has saved 2.3 times their salary please let them know i'm single at the moment.

Good News! You've got a plethora of choices! However, they're all unemployed...

DVMResident wrote:While we're at it, net worth is not particularly meaningful either. Many people for example have the bulk of their net worth tied in their house and car...

Agreed that networth is not the best measure. What if I'm 23, make $30,000 and my entire networth was tied to a $70,000 truck? Based off of this calculation, I'm doing real well with all that truck equity!

Rodc · Post by **Rodc** » Fri Jul 22, 2016 10:47 am

TomatoTomahto wrote:We were fine. Then my wife got a big raise last year. Now we're bums again.

How silly.

ETA: actually, we are close. Still silly. We were killing it before her raise

Damn those raises. Ruin everything...

My wife is moving to semi-retirement next year, we'll look even better than this year!

Formula does not take into account pensions of which we have two - We are right about what the formula suggests without pensions and will be above as soon as my wife's income drops. But with pensions obviously ahead.

Rules of thumb like this would be better if they just used desired income in retirement rather than current income. I understand that is a complication for some, especially if far from retirement (but of course when far from retirement any such formula is even more nonsensical).

goodenyou · Post by **goodenyou** » Fri Jul 22, 2016 12:00 pm

If you used average income, it would smooth out the formula. If you just got a raise, use days of income. If you just started making $365,000, use $1000 times the number of days making it. I still think it (should) underestimates net worth.

Rodc · Post by **Rodc** » Fri Jul 22, 2016 12:05 pm

goodenyou wrote:If you used average income, it would smooth out the formula. If you just got a raise, use days of income. If you just started making $365,000, use $1000 times the number of days making it. I still think it (should) underestimates net worth.

Why try to make a bad idea a little better?

Why not use a good idea instead?

Artsdoctor · Post by **Artsdoctor** » Fri Jul 22, 2016 12:14 pm

ALL calculations listed above are not helpful.

Is this actionable?

Rodc · Post by **Rodc** » Fri Jul 22, 2016 1:19 pm

Artsdoctor wrote:ALL calculations listed above are not helpful.

Is this actionable?

Helpful is in the eye of the beholder. Many are clueless and so even a lousy rule of thumb is better than nothing. If this got someone to thinking and got them to increase savings that would be an action and a good thing.

Optimal? No. Totally worthless? Maybe not for all.

goodenyou · Post by **goodenyou** » Fri Jul 22, 2016 1:36 pm

Rodc wrote:
goodenyou wrote:If you used average income, it would smooth out the formula. If you just got a raise, use days of income. If you just started making $365,000, use $1000 times the number of days making it. I still think it (should) underestimates net worth.
Why try to make a bad idea a little better?

Why not use a good idea instead?

Agree.

Texanbybirth · Post by **Texanbybirth** » Fri Jul 22, 2016 2:17 pm

JamesSFO wrote:I like these sorts of rules of thumb (much like "Your Money Ratios" book) to help get some calibration on how you are doing.

The Your Money Ratios version is nice in that it is linked to 80% income replacement at age 65 with different multipliers for ages 20-65:
Code: Select all
Age	Capital to Income (CIR)
25	0.10
30	0.60
35	1.40
40	2.40
45	3.70
50	5.20
55	7.10
60	9.40
65	12.00

This is the first ratio I've seen where my family is actually on the right side!

That is, unless "Capital to Income" has some strange non-obvious meaning that I'm missing.

JamesSFO · Post by **JamesSFO** » Fri Jul 22, 2016 6:10 pm

Texanbybirth wrote:
JamesSFO wrote:I like these sorts of rules of thumb (much like "Your Money Ratios" book) to help get some calibration on how you are doing.

The Your Money Ratios version is nice in that it is linked to 80% income replacement at age 65 with different multipliers for ages 20-65:
Code: Select all
Age	Capital to Income (CIR)
25	0.10
30	0.60
35	1.40
40	2.40
45	3.70
50	5.20
55	7.10
60	9.40
65	12.00
This is the first ratio I've seen where my family is actually on the right side! That is, unless "Capital to Income" has some strange non-obvious meaning that I'm missing.

Capital = net worth [do not include homes per author]
Income = annual income

So if making $100K year, then if age 30, they would say you should have $60K saved... But if 60, $940K saved...

acejacksingh · Post by **acejacksingh** » Sat Jul 23, 2016 9:51 am

This can't be a reliable calculation...

Age: 27
Pretax Income: ~$80,000
(27*80,000)/10 = $216,000

My NW is about half that and I thought I was ahead of the game....

goodenyou · Post by **goodenyou** » Sat Jul 23, 2016 2:22 pm

acejacksingh wrote:This can't be a reliable calculation...

Age: 27
Pretax Income: ~$80,000
(27*80,000)/10 = $216,000

My NW is about half that and I thought I was ahead of the game....

What is your average pretax income over the last 5 years or over the years you started working? Put in zeros for each year you had no income (Zero). Now how does it look?

gasdoc · Post by **gasdoc** » Sun Jul 24, 2016 7:53 am

goodenyou wrote:
GMan82 wrote:So EmergDoc (White Coat Investor) has a good rule of thumb directed at physician.

Expected Net Worth of a Doctor (ENWD) = Average Post-Residency Income X Years Since Training X 0.25

That rule is a bit more palatable for those of us who spent a long time in Med school and residency and fellowship. Per that rule, my ENW would be roughly $68k about now. I'm actually about -$70k at the moment, which is way better than the original -$165k I was when I started my first attending job 11 months ago.

Going by the rule from the OP, I'm supposed to be worth about $1m right now. Far from that!!! So far!
That formula seems to estimate a low net worth. If you had a post residency average of $500,000 x 20 years= $10M x .25=$2.5M. $2.5M for 20 years of $500,000/year should be very low, unless you are high spender. I would imagine the formula breaks down at extremes.

Remember that the tax man taketh a large amount at the higher income ranges. It can be hard to catch up when you start late, and have large school loans to initially overcome.

Sincerely,
gasdoc

ks289 · Post by **ks289** » Sun Jul 24, 2016 8:05 am

As other posters mentioned, this is the calculator mentioned in the Millionare Next Door book for average accumulator of wealth (in the middle two quantiles). If you want to be a prodigious accumulator of wealth (top quartile) you need to divide by 5 instead of 10.
All of the limits to such a simple calculation are valid, but perhaps it can provide some benchmark to aim for.

goodenyou · Post by **goodenyou** » Sun Jul 24, 2016 9:30 am

gasdoc wrote:
goodenyou wrote:
GMan82 wrote:So EmergDoc (White Coat Investor) has a good rule of thumb directed at physician.

Expected Net Worth of a Doctor (ENWD) = Average Post-Residency Income X Years Since Training X 0.25

That rule is a bit more palatable for those of us who spent a long time in Med school and residency and fellowship. Per that rule, my ENW would be roughly $68k about now. I'm actually about -$70k at the moment, which is way better than the original -$165k I was when I started my first attending job 11 months ago.

Going by the rule from the OP, I'm supposed to be worth about $1m right now. Far from that!!! So far!
That formula seems to estimate a low net worth. If you had a post residency average of $500,000 x 20 years= $10M x .25=$2.5M. $2.5M for 20 years of $500,000/year should be very low, unless you are high spender. I would imagine the formula breaks down at extremes.

Remember that the tax man taketh a large amount at the higher income ranges. It can be hard to catch up when you start late, and have large school loans to initially overcome.

Sincerely,
gasdoc

I agree that medical education is outrageously expensive and excessively long. For those at the top of the income spectrum, however, the formula underestimates the expected net worth. This would be true regardless of taxes, time (more than a few years) in profession (since it is the average income) or unique to physicians. The important factor is spending.

MrNewEngland · Post by **MrNewEngland** » Tue Jul 26, 2016 12:27 pm

acejacksingh wrote:This can't be a reliable calculation...

Age: 27
Pretax Income: ~$80,000
(27*80,000)/10 = $216,000

My NW is about half that and I thought I was ahead of the game....

Sometimes I think I just stop by here to feel bad about myself. I'm 38 and just broke $80K about a year ago. My NW is a little ahead of where this calculation says it should be but I still feel behind where I should be.