In last Wednesday’s link round-up, I pointed to an article over at Gen-Y Wealth in which RJ has listed **20 financial milestones you should reach in your twenties**. “I like this list,” I wrote, “and I’d actually love to see similar lists for different age ranges. People could use it as a sort of road map to where they ought to be.”

What sorts of milestones were on the list? Things like:

- Pay off your student loans.
- Build an emergency fund.
- Learn to negotiate.
- Set a target retirement date.
- Learn to give.

Like me, a lot of GRS readers found RJ’s list of financial milestones useful. Often, there’s no real way to know if you’re doing things “right”. How much should you be saving for retirement? How much should you have in your savings account? How soon should you buy a home? Get married? Have children?

Obviously, there’s no single right answer to any of these questions. Everyone is different. We all have different strengths and weaknesses, and we all have different goals. Because of that, no single list of milestones is going to be applicable to everyone.

Still, it’s helpful to have *some* sort of road map. A road map lets you gauge your progress, and can help you know when you’ve lost your way. In fact, I think a lot of folks — including me — would love to be able to compare their financial progress to some sort of standard checklist like the one RJ provided.

One way to do this, I suppose, would be to sort through the economic data collected by agencies like the Federal Reserve and the U.S. Census Bureau. (Every three years, the Fed conducts its survey of consumer finances, which is a gold-mine of info about how Americans spend money.) But this only works if you’re resourceful and like digging through data. Besides, you’d have to construct your own benchmarks from the numbers you found.

**One useful benchmark**

I may have encountered other lists of milestones in the past, but I can’t remember them. The one benchmark that’s stuck with me — and it’s not really a milestone like the kinds RJ describes — comes from *The Millionaire Next Door* by Thomas Stanley and William Danko [my review].

The authors suggest a simple way to gauge where you should be on your financial journey:

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.

Some of that sounds like jargon, but it’s actually fairly easy to understand. Here’s my attempt at a translation:

- Calculate your annual
*pre*-tax household income. - Divide your age by ten.
- Multiply these two numbers together.

Ignoring inheritance, your expected household net worth is the product of this calculation. So, if you and your spouse are about 35 years old and you make $80,000 a year, your calculation would look like this:

If you’re 35 years old and your household income is $80,000 per year, your expected net worth is $280,000.

**Prodigious accumulators of wealth**

Based on this equation, Stanley and Danko classify folks into three categories:

- A
**prodigious accumulator of wealth**(or PAW) has more than*twice*the expected net worth for her age. In the above example, her net worth would be over $560,000 instead of $280,000. - An
**under accumulator of wealth**(or UAW) has less than*half*the expected net worth for his age. In our example, his net worth would be $140,000 or less. - And an
**average accumulator of wealth**(or AAW) falls somewhere in the middle.

The interesting thing about this formula is that it adjusts based on life circumstances. Somebody working minimum wage at a coffee shop can still be a prodigious accumulator of wealth if he manages to set aside a large portion of his paycheck. And a highly-paid doctor can still be an under accumulator of wealth if she spends every penny she earns.

When I first read *The Millionaire Next Door*, I dismissed this formula as silly. “It leaves so much out!” I thought. Part of the problem was that I was an under accumulator of wealth. (I was 35 years old and earned about $50,000 a year. My net worth ought to have been $175,000. It was much, much less.) I didn’t want to like any rule of thumb that basically told me, “You suck at saving!” — even if it was true.

In time, though, I’ve grown to like this benchmark. I think about it often, and I now believe it’s a useful barometer for gauging financial health. **I wish I could find more useful benchmarks like this one.**

*Unsurprisingly, by getting out of debt and learning to save, I’ve improved my net worth — and left behind my days as an under accumulator of wealth.*

**Note:***Whew!*

**Benchmarks vs. Milestones**

As I say, Stanley and Danko’s forumla isn’t really a milestone. It’s not an event like buying a house or paying off student loans or starting a Roth IRA. Instead, it’s more of a benchmark, a standard you can judge your progress by.

I’d love to find *more* financial benchmarks like this, and more milestones like those that RJ listed last week. (I’m not really looking for financial rules of thumb, which I consider a different beast entirely.) In fact, I’ve started a text document to collect these milestones and benchmarks. So far, though, the document contains only a link to RJ’s blog post and the quote from *The Millionaire Next Door*.

**Do you have a favorite financial benchmark or milestone?** How do you use it? How has it helped you? (Or do you find these sorts of things useless?)

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@JD – I’m glad you went ahead and completed this article.

One other financial benchmark that I have found useful, I define as net wealth. The idea is to take your net worth and divide it by your average daily expenses. While it’s hard to pinpoint a benchmark of where exactly you should be, I find this statistic better than calculating only your net worth.

I know Jacob from Extreme Early Retirement, takes his net worth / (average monthly expenses*300). If he is over 1, then he considers himself financially independent.

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The formula says I should be worth $459,000 (170000*(27/10)). As of my last paycheck, I finally have a positive net worth (thanks, student loans). Like others have said, this math kind of falls apart for young people…

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This simplistic formula only sets people up for failure because it fails to take into consideration the fluctuations in values that both the stock market and real estate investments are subject to. To wit, I have made the same salary for the past four years, have spent and saved the same amount and yet I have gone from a PAW to an UAW and am now back to being an AAW. It also fails to measure liquidity, which gives people the ability to better control when they have to sell assets. Even financial experts like Suze Orman are now recommending hitting the six month emergency fund goal before retiring debt. I agree.

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Instead of (Age/10) * (yearly income), there’s a very similar number that I think is much easier to think about:

(Your age) * (monthly income) – it works out to 83% of the above number, but it’s much easier to visualize.

What this says is that every year, you should add one month of that year’s income to your savings. Your previous savings will grow about as fast as your income does, so if you add one of each year’s income, your pile will be about as big as required.

In the early years you are obviously behind the curve, as you’ve saved nothing from zero to the early twenties. However, in your 20′s and 30′s, your prime earning years, you also probably don’t have kids and your tax bracket is low.

One month of pre-tax income every six months for the first few years is more than do-able. Once you get close, one per nine, and then one per year.

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I agree that benchmarks can be a useful tool–sort of like a guidepost to help you judge whether you are on the right path to your destination. But I think they can be tricky. For some people, benchmarks might be the fuel they need to enhance their motivation to work toward their financial goals. But for others, benchmarks might lead to feelings of discouragement and frustration, thereby interfering with their motivation.

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I think there is a lot of value to this metric. But it seems like a lot of people really don’t like to hear that they are under or average accumulators of wealth.

Reality check #1 – most people are under or average accumulators of wealth. There are very few people who are prodigious accumulators of wealth.

Reality check #2 – most people are not good with their investments or savings in relationship to their income.

To understand how Dr. Stanley reaches the benchmark formula that he uses to determine what kind of accumulator a person is, many people reading this post should go check The Millionaire Next Door out from their library and understand what kind of research he did to reach his conclusions. Since he has spent over 30 years researching wealth and wealth accumulation – I think he might have more expertise on this subject than any of us here.

For the record, our family is an average accumulator of wealth. And looking back on some of our decisions regarding how we spent our money and lifestyle choices we made – it is clear why we are not considered PAWs. The nice thing is that any of us can make different choices if our goal is to be “A Millionaire Next Door”.

Remember – this metric was developed to indicate whether the person using it is on or off target to become a millionaire next door. Not everyone will be.

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Based on the linked Federal Reserve study, the median net worth of all families in the US (in 2007) is $120,800.

Broken down by age of head of household:

Under 35: $11,800

35-44: $88,700

45-54: $185,000

55-64: $253,700

65-74: 239,400

75 and over: $213,200

Those are real numbers for real people, not based on an arbitrary invented formula.

Also there is a *huge, gigantic, enormous* difference between net worth of homeowners vs renters. The median home owning American family has a net worth of $234,100. The median renting American family has a net worth of *only $5,100*. No, I didn’t leave out a zero.

This shows that the median American has essentially no savings outside of the equity in his home. If you have any other savings beyond this at all, you’re doing pretty good, by the actual metrics, regardless of things like this formula that make you feel like you’re falling behind if you haven’t saved a quarter of a million dollars by age 35.

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According to this formula we only have about 20% of the net worth we ‘should’ have :-/ But our combined salary has increased by about 50% in the past two years or so.

As for suggestions of other formulas – I currently use something called a “wealth score” that I read in a MSN Money article years ago: Wealth Score = Lifetime Earnings / Net Worth, expressed as a percentage. For the first third of your working life (~ age 20-35) your WS should be 0-25%; second third (~ age 35-50) WS should be 25-100%, and final third (~ age 50-65) WS should be 100-200%. Ours is currently 12% at age 29.

You can get your lifetime earnings figure off of your annual social security statement (although I have to adjust mine because it doesn’t count grad school stipends – which I guess is one of the reasons why we’re ‘behind’ according to the other formula).

Also, @ Tyler: we have -$38,000 in home equity. So I guess we’re doing awesome to still have the net worth that we have. The statistic may be true on average, but I’d be interested to see how much it changed since 2007, after the housing market crash. I know our personal net worth would be a LOT higher if we hadn’t bought 6 years ago…

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the formula is absurd. A 12 year old who starts babysitting and earns $1500 in the first year year, would have to save $1800 (or MORE than he/she earned) to be an average accumulator.

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Also, from the study J.D. linked:

Of Americans net worth (in 2007), 2/3 of it (65.7%) is in the form of non-financial assets. This is almost all in the form of their primary residences (48%) and business equity (30%). This means that even for that home-owning family with a net worth of $234,000, two-thirds of that net worth is tied up in things that aren’t easily salable, namely their homes and businesses. Only $80k of that $234k will be in liquid assets like cash and stocks.

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This formula way understates the net worth you need to retire on financial assets. If you make $50,000 at age 65, you would have $325,000 according to the formula. That would let you have an income of $13,000 if you want to retire.

Definitely not enough. As some above have said, it should be lower if you are young and much higher if you are near retirement age.

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I for one, come up short using Dr. Stanley’s formula. I am an “under-accumulator of wealth.” Now this might be because I negotiated myself an awesome salary a couple years ago and it might also be because I’m 27. But when I run the numbers, at my current savings rate, I can hit the “Average” number in 19 months. At that point, I’ll continue saving and hit the “prodigious accumulator” mark some time in my 30s. How good does it feel to imagine that time? When I have capital working for me!

So, it’s your choice–find motivation or be a critic–I guarantee one leads will lead to more and more production while the other will leave you with the same old same old.

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I set up a personal one and just pulled the number out of thin air. In 5 years (when I’m 25) I want my net worth to be $250,000. As I’m currently in the negatives, I have quite a bit of work to do. I’m hoping that taking on clients and aggressively paying down debt will help with that. Also, I’m contributing to retirement in 2011 so I’m excited, and have a goal to max out my IRA every year.

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I like the chart in #15 – I’m in the top 8% of my age group and I’m the young side of said age group. So I was an average accumulator of wealth according to one formula and in the top 8% according to an actual poll.

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Just throwing another vote to the formula not working camp. I live in a high expense area, am 31 and make over 200k. I have nowhere near the 600k+ net worth I’m “supposed” to have.

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‘…when I run the numbers, at my current savings rate, I can hit the “Average” number in 19 months. At that point, I’ll continue saving and hit the “prodigious accumulator” mark some time in my 30s. How good does it feel to imagine that time? When I have capital working for me!’

Does that actually feel good? “Man, in only 19 months I’ll have met some arbitrary goal based on almost nothing, but hey, it was published in a book!”

I like my accomplishments to be more concrete, which is why I don’t like this formula. This formula is about as motivating to me as “leveling up” in an online RPG, or collecting “credit card rewards points”, which is to say “not at all”, although I realize this has an immense effect on some people.

If I’m going to strive towards a number, it at least has to have its basis in reality.

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@ib12541 – I agree. That’s the way I read the formula.

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I TOTALLY disagree with the PAWS and UAWS calc. It only works if you have a stable income over a period of time. If your income is accelerating rapidly (such as young professionals) then it skews your income to the wrong end. For example, we are should have a networth in the millions, but we have only had our high income for the last couple of years. While our networth is accelerating rapidly, its not fast enough for the calculation. I have a couple of good posts about this on my blog.

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hm… I like leveling up…that’s why I’m not allowed to play computer games anymore…

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Setting aside everyone’s complaints with this particular formula, something that drives me nuts about pretty much every piece of personal finance advice that I have ever run across is that it seems to assume that the audience (me) is either single or married to someone at a similar life stage and with similar goals. Suffice it to say that isn’t true for me (yet DH and I do have fully combined finances; when I say our goals aren’t similar, I mean we’re in different places in our lives, careers, and, yes, goals, not that we haven’t inextricably linked our lives financial and otherwise). I’ve never found a discussion of how to adapt these rules (or any advice) if, say, one of you is retired and the other is working full time.

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“However, in your 20′s and 30′s, your prime earning years”

Yeah, my 20s and 30s are my prime earning years. Maybe if you’re a popstar? For the rest of the 99.99% of us, your prime earning years are in your late 40s and 50s.

The people defending the formula are not rationally explaining why it’s correct, they are just saying it’s a “goal”. That’s ridiculous. Explain why it should be a goal, since we’ve already shown that for people in their 20s and 30s it doesn’t make any sense (and seems to not work that well for people at retirement age either…so it’s good for people in their 40s and 50s?). I guess it seems obvious to you guys that if I get a 40% raise today, tomorrow I should have retroactively saved 4% of my new salary every year since I was born? Ludicrous.

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Well, according to this formula we’re average, but we feel more like underaccumulators, and if I deduct the 140k still outstanding on our mortgage, we’re definitely on the lower end of average, although still above UAW. Couple that mortgage debt with another sharp downturn in either the housing or stock market and we’d almost certainly find ourselves falling into the underachieving category, even though we’ll likely acheive MND status in the next 3 years or so (next year if we don’t count the mortgage debt).

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While I totally appreciate that the formula is flawed (esp. for younger savers), I don’t agree with the “using real numbers from the census” approach either. Getting guidelines from the masses when the masses have sort of shown themselves to be in big financial trouble is not a good route.

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According to that formula, I should have a networth of $260,000, which is absolutely silly given I’ve only been out of college 3 years, have a ton of student loans, and live in a very high COL area.

To be honest, I read “Millionaire Next Door” and knew that wasn’t something I wanted to achieve. I don’t see the point of denying yourself a good life just to have more cash in the bank. At that point, it seems like money has become the Stuff in your life. Giving up everything just to have more of it.

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@Adam:

But hey, on the bright side: with this formula, if you get laid off tomorrow you don’t need any savings at all!

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@Tyler (#75)Ha! That’s a pretty funny math joke.

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I have read the book the Millionaire Next Door and personally I find the book and formula to be about right.

IMO people who comment that the formula is useless and inaccurate are basically in denial. The formula works well for 25 years old and above (or whatever age you graduate from collage plus about 2 years of working experience).

Please note that the formula gives people the Net Worth target to aim for – not savings. If you can’t reach the AAW numbers, then do review your saving habits and invest more wisely.

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I did this formula based on someone at retirement (65) that had a salary of 120k. It came out to 7,880,000, which if you were to draw 4% (what most ppl say you should draw annually), would only leave you with 31k a year in retirement. This doesnt sound like a very good formula if you have to adjust your lifestyle so much in retirement. What do you think?

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I think the benchmarks we’re setting for ourselves at this point are to have the mortgage paid off, a year’s worth of living expenses in the bank and a million in retirement.

After that, I think it would be 2 million in retirement, which is what we’re thinking is our ultimate goal.

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I find the formula problematic at the low end as well, but I took a previous posters advice and tried to look at the numbers a different way.

If you make the median US income of $50,000 a year pre-tax, at 30, your net worth should be about $150,000. If your income never increases past 50k/yr, then every year your net worth should increase by $5,000, or 1.2 months worth of pre-tax salary.

Now, lets assume you’ve been able to put away that $5k/yr since you were 25. If you do nothing but that every year for the rest of your life, you’ll always be $120k behind where the formula says you should be.

What happens though if you double your savings rate from 5k to 10k/yr? Sure, this may be a long stretch for some people, but it comes out to be worth it in the end.

If you make 50k/yr and save 10k/yr (a 20% savings rate… not as hard as you think), you’ll hit the break-even point at age 50 (assuming again that you didn’t start saving until 25/26). At 65 you’ll be $75k ahead.

Like compounding interest calculations, this really illustrates the impact of debt and delayed income. Folks who pursue higher degrees have a lot more ground to cover in fewer years, but presumably the degree should enable greater earnings in the long-term to make up for that.

Do not look at the equation as a “Where should I be now at 28?” since unless you have some sort of major windfall, it’s virtually impossible to hit the number that young. Instead, take it as a target to eventually hit and figure out how to reach it.

Based off of some quick Excel work, it looks like you need to at least double the annual expected net worth increase every year to make progress against the goal.

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My favorite formula, that seems to apply across the spectrum of ages and salaries, is equivalent to the “Burn Rate” formula that small companies/startups use.

Essentially, how many months (or years) can I live without income at my current savings amount.

The formula = (savings / annual spend). If you have $50k in svgs, and spend $50k/year….then the ratio is 1.0 and you could essentially live like you’re living for one year.

The goal is to start with small goals (like a 6 month cushion) and grow it to financial indepedence (which some people would say is 25 years of burn.)

This number is very reassuring in my mind to people in their 20s/30s as well as 40s as they guage their appetite to take risk, specifically in the career market. To me, there is nothing more comforting than going to work (during rumors of layoffs) knowing that even if I were affected I would be fine for ~1 year or more. It would be extremely stressful if I couldn’t pay next months bills without my paycheck coming in.

This metric also is self-adjusting: the more you spend, the more you need to save to stay at the same years of “burn.”

Cheers!

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“The formula works well for 25 years old and above (or whatever age you graduate from collage plus about 2 years of working experience).”

So in 2 years of post college, you should have saved up 10% of your current salary every year retroactively since birth AND magically removed any student loans you acquired?!!?! If I worked 2 years at $50,000 after college and am 25 years old, I should have saved $125,000? 25% more than I earned pre-tax? And have no debts at all, so college should magically have paid for itself?

Do you people even know how ridiculous you sound? Please go do some math before you post.

@Tyler – Touche!!!

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Matt – 4% of 7,880,000 is 315K a year – more than enough for a retiree to live on if they spent their lives making 150k a year. check your math.

It feels a little silly to continue to say that those who are arguing the formula should really read the book, but there you go. Because the book makes it clear that the formula makes more and more sense the older you are. Most of the millionaires in the book are in their 50s, self employed, and extremely frugal. Most have lived in the same house since they bought their first house. Most of them save at least 15% of their salaries – and often much more. Most of them have never spent more than 300K on a house. Most of them have never spent more than $300 on a suit.

It is an entire lifestyle that Dr. Stanley is discussing, and one that has been occurring for around 30 years of the respondents adult lives. That is where the formula comes from.

There are lots of ways to be a bigger saver than most people are. Living at home during and after college to save money. Living with roommates in a tiny apartment even after you get that first job that pays a “real” salary. Going to the college that you don’t have to take loans out to attend. Eating at home as opposed to eating out regularly. Not buying new clothes unless there is an absolute need.

Most people don’t want to live that lifestyle. Which is fine. Unless you want to succeed like the people that Dr. Stanley profiles. In which case, hey read the book, change your behavior and you too might become a PAW.

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Mike the red did the formula wrong, a 65 year old who earned $120k a year would only need to have saved $780,000. Which is WAY under what they would need to have saved to maintain 80% of pre-retirement income. The formula doesn’t work for 65 year olds either, as it understates what they need.

Seriously, bad formula (unless you’re in your 40s and 50s I suppose).

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Adam

My understanding is that you have to double the formula (or more) to be considered a PAW and 50% (or less) of the formula is a UAW. So the 65 year old who made $120K a year would have to have at least $1.56 million to be considered a PAW at retirement. At 4% withdrawal rate, that would be a little over 62K a year, plus social security which would be about 24K a year. Which is 86K a year in retirement – not bad at all if you already own your home outright and have no debt. It is substantially higher than the median income – let alone retirement income.

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Does anyone feel confident about wether to include a home as part of net worth calculation? It seems like it could lower my net worth (if treated as a debt), increase my net worth (if I use the value of the home) or some combination of the 2 (if I use the value in relation to the debt).

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Posts like this do nothing but make me think I have to give up on the whole idea of ever being able to retire. My new husband and I are in our mid-30s, and he only just this year started paying off his 10-year-old $50k student loan, plus we bought our first house last year, owe $4k on a credit card (due to house repairs), and another $5k in personal loans. After mortgage and bills we have about $1k a month to put into savings or pay debts (not including the student loan) – *if* we spend absolutely nothing else, and no emergency expenditures come up (yeah right!). And we’re supposed to have a net worth of $200k? Really? We’ll get right on that when we pick up our *third* jobs.

I thought the name of this blog was “Get Rich Slowly”, not “Get Lucky and Get A High Paying Job Right Out of College With No Debt To Pay Off and Have the Common Sense Not to Blow It All.” Try not to discourage your readers, hmm?

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Assuming you are, say, 24, and working for 50k a year, for 2 years, the formula assumes you should have saved 50k*2.4=120k, when you’ve only actually earned 100k.

Maybe the formula works for someone in their 40s or 50s, but then your salary would have been changing much of the time you were in the workforce.

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@ Sashie

I don’t know where you are getting your numbers from. So I’m to double the formula to get to where I’d be a good accumlator of wealth? Why isn’t the formula (age * income / 5) instead then? Since the book focuses on being PAWs? Or does that doubling thing only make sense if you’re 65? I think doubling it would make you about where you should be at 65, as you said, that would give the retired person a decent income but less than the 80% recommended (96k is 80% of 120k, not 62k as projected).

I also thought it was an “under-at-over” formula. As in if you have more than the amount determiend you are a PAW, and less you’re a UAW?

Doubling it, as you suggest is what they want, makes it even MORE ludicrous for younger people, by the way.

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@ Sashie

Apologies, I read now that yes, they want PAW to have double the “expected net worth” at all ages. My bad on not seeing that earlier.

This formula is seriously flawed unless you are in the perfect age range, JD. Please make a new post soon to discuss a formula that works for all ages or segregate formulas into different ranges. Because I think it’s extremely unrealistic for 20-35 year olds to be a PAW if they are to “double” the value calculated here, and retired people need to be far above AAW if they want any decent standard of living (based on 4% withdrawal).

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@AdamI’m cogitating on a follow-up post. The problem, as this discussion clearly demonstrates, is that it’s tough to create benchmarks and milestones that are applicable to a wide range of people. I mean this one comes from one of the most-respected personal finance books of all time, yet it’s clear that it just doesn’t work for many (most?) circumstances.

It may take a few weeks or months for me to do a follow-up, but I intend to do so. I’ll go into “collecting mode”, looking for other forumlas and benchmarks to share. Sound good?

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Is there anyone my age who has actually hit any of these milestones? I’m 26 and my net worth is more than $20,000 in the negative due to student loans. By the time I kill them I’ll be over 30…and so far behind I’ll never catch up by those standards.

I much prefer a list of “things you should do,” rather than “things you should do BY THIS TIME”–that way even if it takes me longer I won’t have failed.

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I think focusing on expenses is preferable to income in terms of net worth calculations, so I second taking a look at Jacob’s methods described here: http://earlyretirementextreme.com/day-10-calculating-net-worth.html

or here:

http://earlyretirementextreme.com/day-14-investing-for-early-retiremen.html

@eva – just because you’re paying student loans until you are 30 doesn’t mean you can’t have positive net worth.

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@ eva – I think one of the points behind the complaints is that by these standards, there is a pretty good chance that you WILL eventually ‘catch up’…possibly to the detriment of your actual needs. The benchmark places near-impossible standards on younger people, but vastly underestimates the needs of people near retirement. I believe it also fails to take inflation into account.

If I extrapolate out our current income to age 65 with a 3% raise each year, we need to have approximately $2.9M saved in order to be ‘average accumulators’ – it sounds like a lot of money, but at the safe withdrawal rate it will barely replace a quarter of our income by that time. Even if we were prodigious accumulators, with twice the formula’s net worth calculation, we will still only be replacing 52% of our income. Given that a) the general rule of thumb is 70-80% of your pre-retirement salary, and some financial planners even recommend 100% due to projected increases in medical costs and b) social security is being run into the ground and will likely not even come close to replacing 25% of our generation’s pre-retirement income, I think the benchmark fails. It is mathematically unrealistic-to-impossible for people at the beginning of their careers and provides a false sense of security for older people.

To further elaborate on the wealth score system I mentioned in comment #58, if I do the same 3% extrapolation on our current salary and on our lifetime earnings, then in order to meet the bottom of the benchmark at age 65 (net worth equal to 100% of our lifetime earnings) our net worth should be about $10.8M by retirement. This provides us a healthy 97% of our pre-retirement income each year.

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@91

TMND is not “one of the most respected personal finance books of all time.” It was a popular book, it sold a lot of copies, it had a semi-clever message, and much of it is completely unsupported by any data. To say is lacks rigor is an enormous understatement. When the authors come up with their formula(apparently based on nothing), that is not some small footnote. It is a central part of their message, and it is completely without foundation. It overestimates what young workers should be accumulating; it underestimates what retirees need, but I guess somewhere in the middle it is exactly right. And a stopped clock is right twice a day, so no need to fix it.

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This equation has bothered me the first time I read it, back when I was in the early-career range for which it works so poorly. It bothered me for the reasons so many peopel here have already pointed out (a new job or salary increase actually hurts your score).

And at first it bothered me again now, when I’m in the career range to which it supposedely fits best. I felt crappy for not even being an AAW, even though we have a huge emergency fund, retirement accounts, an almost-paid-off mortgage & no debts. I’m a failure according to this benchmark.

But I’ve decided that I’m not going to care about this benchmark, because being a PAW isn’t my goal anyway. Our life goals aren’t about having a certain amount of money at the end of the race. We’re not trying to leave a huge chunk of money for our heirs (and the Millionaires book devotes a good bit of space to the problems that come with doing that). We want to have enough and then some, and we also want to give a lot away, to keep learning, to travel & to enjoy our lives. None of that is measured by this benchmark.

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According to this formula, I’m a PAW, but even I think the formula is flawed. I’m 31 and I don’t think my liquid assets are sufficient. I live in a high cost-of-living area and even though I’m saving 40% of my gross income, I can’t retire comfortably until 57.

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@Adam says “Do you people even know how ridiculous you sound? Please go do some math before you post.”

@Adam, just because you can’t imagine people saving $125,000 at age 25 yrs old doesn’t invalidate Dr. Stanley’s research. Also, from your determination to argue with anyone who thinks the formula is useful, I seriously doubt that you have an open mind to discuss this matter.

Granted that most people who posted comment on this article thinks that no one can save much money right after college, it may surprise you then that the demographic of readers of this site is skewed.

I know plenty of classmates at college who graduated without debt. For example, my parents paid for my education. I lower the cost further by staying at home through college. My brother went to college in another city, but paid his way through it via internship. Both of us graduated without debt, but instead had some savings.

As for whether anyone can save $100K in 2 years on a $50K per annum salary, it really depends. Not anyone can do it, but it is not impossible either.

From my experience, I can save up to 40% of my take home pay, yet live quite comfortably. This means I could save $30K in 2 years. With this money, if I had invested wisely during the stock market crash days of 2008/2009, like buying AAPL stocks, then I’ll have about $100K now, won’t I? (The stock actually went up 4 times between Jan’09 and today.)

For every “impossible” scenario you give, others can give a counter example, so it really doesn’t prove anything. And yes, I did do the math. You can also google around and find forums where others think the formula is useful as a guide and aspiration.

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@JD: “Model averaging” is a technique commonly used in the sciences, when we’re not really sure what’s going on. The situation here is dramatically simpler, though, and pretty exact solutions can be calculated.

As others have noted, the model doesn’t take into account people’s different income trajectories. Surgeons, for example, don’t start making any real money until their mid-30s, while lawyers and financial workers can start making large sums by their mid-20s. Certain professions have clearer limits on their maximum earnings (e.g., teacher), and these limits might be reached fairly early.

The key is to choose which income trajectory (e.g., asymptotatic, exponential, logistic, and more complex curves) is most likely for you given your career and aspirations. I’m sure there are data out there on actual trajectories, i.e., how the incomes of doctors change with years since graduation, how much programmers make, and so on. Ideally, one would select (and weight) several plausible trajectories to incorporate uncertainty–this is basically a form of model averaging that you alluded to, but not everyone would need to incorporate a “linear” model if their income will clearly not grow linearly. One would also need to incorporate uncertainty about interest rates and returns, especially for the people whose retirement income critically depends disproportionately on short periods (e.g., <10 y) of work at extremely high pay.

All one needs to do is calculate, for a given $Z to be saved by age 65 or 70, how much should be saved at each stage given this trajectory. One can even assume a progressive savings rate, so that you're saving 50% when rich and 5% when a student.

This is really not hard mathematically or computationally. Kinda makes me want to be a financial planner, but I have to get back to my research!

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I don’t have any benchmarks at the moment. For milestones every time we get another debt paid off at is certainly one. But since some of our debts are so large, I have also been tracking our net worth every month for the last there years. That helps me to make sure we are continuing to make progress, even if so ethnic hasn’t been paid off yet.

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