Formula works amazingly well for us not including SS, pension, or home equity. This is in todays dollars.
The test seems wonky for this type of example: a highly compensated person in late career. Based on some earlier posts, this person would hardly be able to retire:
55 x $500,000 = $27,500,000 / 10 = $2,750,000
$2,750,000 x .03 = $82,500
I guess I will be more direct. The formula stinks. 
Well, there you go. Opinions differ.
Itâs a bit of litmus test because it depends on who is doing the testing. That was approx the same outcome of that old discussion I alluded to. Some people liked the test and felt good, others were worried. I donât think it is a make-or-break test.
Thanks @AttorneyMother.
The number looks reasonable to me.
We just snuck in on the number, because I used an income that is considerably higher recently than in the past. Counter-balancing that is the fact that, when we made less, we saved a much higher percentage than one would expect, and the markets have been kind for the past few years.
But, itâs similar to the retirement heuristic: my wife got a raise â our net worth stinks now
Weâll call it the new Math!
I think a problem with a formula like that, is that very few people have a completely stable income throughout the entire span of their working years. People lose jobs, quit to stay home with the kids, get big bonuses or pay cuts. Very few people have a stable income trajectory where they are saving the same amount of money through time. Huge life events happen that can completely screw up the formula. We both got a 50% raise about five years ago, but we hadnât been making that income for the last twenty. Most formulaâs Iâve run have indicated that we are way behind in net worth, and it doesnât make sense that just because you recently got a raise that all of a sudden you have saved and invested a much greater amount.
A big raise Iâm counting on is when the last kid finishes college. One more year, and thatâs it!!
Attorneymother, worried?
The formulaâs number is so low, if I used that number, I will end up broke unless I die early.
On the plus side, after looking at the formula, I have excess money.
Who wants the money? 
Wait, are you all trying the formula for both spouses and using total household income twice?
So a married couple each 55 years old with total household income of $150k should have $1.65M? Or only $825k?
Re: âFor example, the idea number for a 55 year old who is making $150,000 year would only be $825,000 by the calculator.â
^ Even $825K is well too challenging for us in our life time â assuming that none of SS, pension and the equity in our home is included in the calculation. (But our household income is not $150K and we are not 55 yo.)
Is our family the only one here which can not dream of meeting this retirement requirement?
Also, I am still at a loss about what formula you are talking about here.
Here is a variation on the first equation of age x pretax income /10.
(Age-27) x pretax income / 5 = target net worth
Mcat. This forum is a tough place to hang out because there are many posters with very large buckets of money. This is far from the norm. The best we can all do is to look at our own bucket and reduce the worst debt that is impacting it.
I pay 13000 a year in property tax. That is my worst debt and I need to move to get out from under it. I will downsize at the same time and get rid of my mortgage. That will greatly improve MY bucket.
^ The author of that article includes the value of your primary residence and all other possessions in his definition of net worth.
I think you could make an argument to include NPV of pensions or SS in a net worth calculation as well, and that makes the picture look a lot better for everyone.
If I start collecting SS at full retirement age and live for 18 years, with a 2% increase per year, the NPV is around $300K. Add 50-100% of that for DW, and we are looking at $500K for the both of us.
@mcat2â, these formulas are not ârequirementsâ, they are one personâs opinion about whether you are saving âenoughâ. They can be entertaining to try out and talk about. But you have to figure out what your specific retirement needs will be, and then assess where you stand, and not judge things by some formula in a book or article.
@notrichenough, the problem with net worth is that it always seems to be a fuzzy definition. NPV SS and pensions? Okay, but then why not NPV future earned income (human capital)? I think the reason there isnât a universally recognized definition is that there is no universally recognized use of the net worth number.
It can be used by a lending institution. It can be utilized by someone youâre dating, or their parents, to determine whether youâre a good catch. It can be utilized by you to determine how youâre doing. It can be utilized by economists (in the aggregate) to argue their viewpoint.
Fwiw, when I compute net worth, I include:
1 - liquid accounts (I know that taxes will be due, but whatever)
2 - the excess equity in our home (we could and will live quite well in a house that costs less, so I count roughly half)
3 - the cash value of my wifeâs pension, on the theory that, when the time comes, we could lump sum it
4 - the deferred compensation that will, 99% likely, be vested and paid out over the next 3 years
@mcat2 That was only an example. Usually there are other posters will jump on those and make a big story about nothing.
I am also years from reaching 55, strictly speaking.
Also, income should not be the only mean to grow your net worth. For those super rich, I am guessing, the investment gain is far far greater than the income. S & P has doubled in since 2011. Even if you just buy index, your investment should be doubled.
many have also rental properties, trust funds, etc.
On the other hand, I would think at least 50% of the 55 year old family of two in US do not have $825,000 net worth.
In theory you could, but
- future earned income is not guaranteed
- earned income (for most of us) funds our day-to-day living expenses, the entire amount will not contribute to your network. You could probably count some small fraction if you know you will actually save it.
Isnât this largely just a NPV calculation?
Here is what I found by googling
According to this paper, majority of the 55 year old family of two in US do not have $825,000 net worth.
Shouldnât you then also count the inheritances?
I only count the liquid accounts for our net worth. Because we just donât have much of anything else.
Itâs a cash balance pension, so itâs sort of the reverse of an NPV calculation. The $ value is known, and it grows by a $ contribution annually and interest also adds to the amount. At retirement, you can take it as a lump, or you can annuitize it with the usual options.
In our particular case, thatâs a total of $11k from my family, and weâre not expecting anything from my wifeâs side. More generally, a lot can happen to an expected inheritance, so Iâd be really reluctant to count it until it happens. If nothing else, it makes me feel queasy.