Photo: Team Tanenbaum via flickr
Most of us are on the standard path to retire at 65 67 and then support ourselves using a combination of investments, savings, and Social Security.It can be useful to know how well you’re proceeding along that path to determine if you need to bump up your investments or savings.
Comparing your actual net worth to where you should be to achieve standard American retirement will help identify if you’re on track.
In the book The Millionaire Next Door the authors offer a basic formula for determining what your current net worth should be:
Multiply your age times your realised pretax annual household income from all sources except inheritances. Divide by 10. This, less any inherited wealth, is what your net worth should be.
Personal finance weblog The Simple Dollar critiques this formula and claims it doesn’t take into account situations such as graduating students entering the workforce or those whose earnings are below the median income.
Instead The Simple Dollar recommends this formula for roughly determining what your net worth should be:
(Average of your last 10 years of annual income) minus ($15,000 and an additional $5,000 for every person in your household, including you). Multiply that by your age and divide by 8. This is designed to take into account people with large increases in income over the years. See the full rationale behind these decisions in the original post at the link below.
Using the $46,000 gross US median income as the average income, if you’re 35 and married with no children, your net worth should be in the neighbourhood of $91,875. ($46,000-$25,000)*35/8 If your current net worth is more than this you’re in good shape and if not you may want to make a few adjustments if you want to retire at 65 67.
What Should My Net Worth Be? [The Simple Dollar