I’ll break all the sterotypes. I am 27 ( not a dink as I have a 2.5 year old son and my wife is a stay at home mom). I stsrted inbesting money into my retirement accounts early on in ny working career and I also got into real estate. Since college my income went from $28,000 a year to roughly $75,000 this year. I am about 50% higher on the net worth side than where I should be. These benchmarks are motivational. It shows something that doesn’t seem possible but obviously is. Once we realize it is we need to analyze how we could achieve it. If we are raised with this line of thinking we make better decisions in our 20s when financially it makes the most difference. If your student loans are killing you you prolly should not have taken that many out. If your mortgage debt is high, you should really have nothing higher than a 15 year note so it pays off sooner and frees you to grow.
The alternative metric I have found is take the gross income from your employment since starting working. Then add it up. Yiur net worth should be 25% -50% of that earlier in your career. As you get closer to retirement you should have a net worth about equal to your lifetime employment earnings. At retirement you should shoot for 200% of your lifetime employment earnings. This is a very agressive benchmark and that is why I like it so much. It stresses the importance of putting money in investments and building assets.

In my early 30′s I was an AAW but now am a PAW. I just read the book. The beauty of the book is it reminded me to stay humble, stay low cost and avoid lifestyle creep. I had been saving so much that my thoughts were to get a nice house by the water in CA- after reading the book I think that will avoid getting sucked in by lifestyle creep!

-Mike

net worth =(((age-year you started earning money)^1.15)*how much you make)/10

In plainer English:
your net worth should equal the number of years you’ve been working to the 1.15 (yeah, that’s an exponent) multiplied by how much you make, all divided by ten.

In spreadsheet talk (MS Excel or OO Calc):
b10=you current age
c10=the age you started working
d10=your current income
=(((B10-C10)^1.15)*D10)/10

This is actually an old/rudimentary version of the formula, I can’t seem to find a nowhere one, but hopefully this will be better for you guys. But tell me what you think.

As far as the benchmarks … if I knew anything about personal finance before I was 28, I’d be in MUCH better shape than I am now… But hey, learning in my 30s is better than learning in my 40s!

I’m in my early 20′s. I recently got a job making pretty good money. This equation puts that number at almost $130K. I haven’t even made that much money in my lifetime…probably not even half that. Down the road this may be useful, but I don’t think it’s reasonable to look at without looking at all the other circumstances – how long you’ve held your job, how much money you’ve made in your life, etc. If anybody can tell me how I can double the amount of money I make (gross, not net) let me know.

I like the road map. That means I have 8 more years to… finish my 60k of student loan repayment…and get 3-6 months in the bank. I think I know parts of negotiating, and I have a target date of 60 years old, although I haven’t done much with it for retirement.. and I try and give whenever I have the financial opportunity, and it makes me feel good.

Except with the formula my net worth should be basically what I owe in student loans, and therefore, I appear to be worth.. nothing.. I do like to think I’m worth something though

What bothers me is how many of the responses reviled the formula giving every reason conceivable as to why it doesn’t or can’t work for this or that age, but then offered nothing as an alternative (a few did).

It’s clear that the best calculations should realistically consider expected expenses at retirement and the necessary amount of wealth it will take to cover those expenses each year. You can adust the benchmark 4% withdrawl rate higher or lower to suit your expectations.

How many here roundly condemned the MND’s formula without having read the book? To condemn something out of context is small-minded and disturbing. I’ve read way too many comments reflecting a lot of self-justification and rationalization.

I expected more from the readers.

Obviously, a 23-year-old making $45k is unlikely to have more than $100k in assets.

This discrepancy is fair enough for a rule-of-thumb, but it becomes dangerous at the other end of the spectrum. If you are 60 and making X, this formula suggests you should be worth 6X. What is an income-reliable return? 7-8% (if lucky)? In the best case, this person would have 48% of his/her income (6X*.08), a level that is certainly not enough.

To begin with, the equation is a “rule of thumb.” It gets you in the ballpark of where you are in relation to others of your age cohort would be expected to be in terms of wealth accumulation. Everyone has had and will continue to have issues in their lives which differ from someone else. Those issues WILL affect how much wealth you have accumulated and how much wealth you will be able to accumulate relative to someone else of your age cohort. A kid coming out of college with $100 K in debt is probably not going to accumulate wealth like his buddy of the same age who went to school on a full scholarship and emerged with essentially zero debt. That’s not the fault of the equation. And it doesn’t matter, because the equation shows a statistical measure of what an age cohort of a particular income is expected to have accumulated, not an absolute measure. Those who have had large student loans, got divorced and paid half of their income or savings to his or her spouse, who lost money in the stock market or real estate values: doesn’t matter to what the statistical measure is.

Many or even most of us will never be in the PAW group, either because of the lifestyle choices we have made, be it educational and employment choices, or because of the bad breaks in life which blind-sided us and set us back. Either way, the GSR readers who are set in their belief that the equation is flawed, need to take a breath, read the book, gain some understanding of what the equation is meant to demonstrate, and take ownership of their situation. The equation doesn’t make you an UAW, nor does it suggest that you are doomed to remain an UAW. In fact, it’s not meant to suggest how well you will be able to retire based on what you have accumulated. It’s simply a tool to demonstrate your level of wealth compared to others of your age and income cohort: do you do better or worse than your same aged/same waged buddy in the cubicle next to you…without excuses/reasons of what has or has not happened in your life.

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!

@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.

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.

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.

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

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.

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?

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).

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.

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.

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?

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.