I’ve been reading some commentary about The Millionaire Next Door from around the time of its publication date. In the book, the authors suggested a formula for estimating what one’s net worth ought to be. I remembered another forum in which I was once active had a heated discussion about this topic. The consensus was that the sum required by the formula is hard to achieve during one’s early working years and is a more realistic target during middle age.
The formula: multiply your age by your realized pretax annual household income from all non-inherited sources and divide by 10.
@ixnaybob, I was a benefits director for several large corporations, two of them with tens of thousands of employees. I read the documents, I edited the documents, and I worked closely with the lawyers to write the documents. I helped numerous employees understand what the most important aspects of their benefits were. (I’m semi-retired now and just work on benefits communications.) You should have come to see me!!
VeryHappy, I did lots of benefit communications work, too, both in consulting and at a TPA.
If I take the present value lump sum equivalent of Social Security and DB plan, plus 401(k) and IRA, we are right in that ballpark. It’s funny, that’s right about the number I was targeting in the first place.
After the real estate crash in 2008, our net worth (not counting our house equity) was close to zero. But the income stream from our RE investments never wavered, so I didn’t lose any sleep.
But by that formula we were in big trouble. Like every rule of thumb, it may or may not make sense for your circumstances.
I think one way to look at it is to consider it like a “BMI test” for financial fitness. It’s not the only test. It’s one test according to these authors, who have a following.
I think there is already a thread devoted to rental properties, but I’ve come to the conclusion that income generating real estate is probably the best way to invest for retirement and beyond at this point. With mortgage rates low and rental demand high in many areas it’s very tempting.
I think if you have a pension, you are in better shape than most - just because it is a guaranteed stream of retirement income. I haven’t read the book, so I don’t know if the authors addressed that aspect. You could discount it and count it as a lump sum and see how you stand.
I also don’t know if the authors intended to include only financial assets or other personal property. To be on the conservative side, I included only financial assets minus the house equity for my test.
