Everybody should have a net worth target to shoot for by age, work experience, and income. Targets will help you stick to your financial plan and motivate you to do more if you’re falling behind. I’ve updated my net worth target chart for 2016 and I’d like to discuss the premise behind the numbers.
These target figures are for those who:
- Take action rather than complain about an unfair system
- Max out their 401k and IRA every year
- Save an additional 20% or more after taxes and 401k/IRA contribution
- Take calculated risks through investments in various asset classes
- Build multiple streams of active and passive income
- Focus on the big picture and doesn’t nit pick with minutiae
NET WORTH TARGET ADJUSTMENTS
Lower Multiples For Younger Folks, Higher Multiples For Older Folks
The main adjustments to my previous net worth target chart are the lowering of the multiple for people in their 20s, and the raising of the multiple for people ages 40 and over. The reason I lowered the multiple for people in their 20s is due to growing student loan debt, wage stagnation, and increased competition for good paying jobs due to globalization. Despite expectations of a large generational wealth transfer, inheritances usually won’t happen until much later in life.
If you so happened to have delayed entering the work force because you decided to go to graduate school or go travel the world like a lot of wealthier college graduates do nowadays, no problem! Simply follow the “Years Worked” column to find your appropriate multiple. For example, if you’re 30 years old with no work experience because you spent your 20s getting a PhD, your target net worth multiple is 0!
On the flip side, partly because of such large inheritance expectations, I expect Millennials and Gen Xers to see significant injections to their net worths after the age of 40. Another reason I’ve raised the target multiples of income after age 40 is because all of us become much more savvy with our money as we get older.
By our 40s, we’ve already gone through 20 years of money making wins and losses. Surely, by now we should all understand our monthly budgets, net worth compositions, spending tendencies, and risk tolerances.
I have found I get much more pushback from folks in their 20s and 30s than folks in their 40s and beyond. The reason is because when we are young, we think we know what we don’t know. We are more arrogant, more stubborn, more know-it-all. As we age, we see the positive effects of compounding that really starts to snowball with a larger financial nut.
Easier To Live On Less When Older
Being able to comfortably live on less is perhaps the biggest reason why target multiples are raised later in life. Let’s say you have a $2 million net worth and make $200,00 a year at age 50. Your multiple is 10, while I suggest it should be closer to 15. If you can find a way to live comfortably off $150,000 a year, or 25% less, then you’re spot on target at 15. If you can live off $100,000, then I think you can retire immediately due to a 20X multiple.
For the first two years after leaving Corporate America, I was making around 50% – 80% less than I did while working. Funny enough, my after-tax savings rate still was over 50%. Saving money is much easier when you don’t work because there are lots of free activities and discounts during working hours such as free museum week, early bird dinner specials, the ability to enjoy free parks, libraries, hikes, etc. Your commuting costs go down as well.
As an elderly person, the biggest X factor are medical expenses and long term care costs. Good thing we’ve had decades to save and enough acumen to take out insurance policies that cover such expenses.
Easier Multiples To Remember
The major age milestones everybody thinks about are 25, 30, 40, 50, and 60. As a result, I’ve made it easier for everybody to remember what multiple to shoot for at each milestone. Aim for a net worth equal to 2X your average income by 30, 10X your average income by 40, 15X your average income by 45, and 20X your average income by 60 or whenever it is you plan to retire.
When I left work in 2012 at the age of 34, my net worth equaled roughly 15X my average income over the last three years. In other words, I fell short of my 20X income target. However, thanks to a severance package that has a five year payout from 2012, I technically don’t really have to start my retirement clock until 2017. Since 2012, I have aggressively boosted my net worth by building an online business, while lowering the amount of income I need to be happy.
I’ve been well over the 20X income multiple for the past several years and I can assure you that I have no fear of running out of money or being forced to live a lower standard of living. Multiple income buffers such as passive income, online income, and consulting income ensure financial security. When I left work at a 15X multiple, I still had money worries despite the severance package. It takes a tremendous leap of faith to try and recoup a 50%+ income decline through an entrepreneurial endeavor.
If there’s one figure to remember from this post, it’s the 20X income multiple. At a 20X income multiple, even if your net worth provided zero returns, it would still take 20 years to exhaust your wealth while maintaining your same standard of living. You could of course invest your wealth in a risk free asset like a CD for a ~2% – 2.5% interest rate to extend the life of your principal. You could also pay off your primary residence to lower your cost of living for another guaranteed return on your money.
You don’t have to wait until you are 60+ to achieve a 20X multiple. If you can figure out a way to do it earlier, all the better! Early retirement awaits.
Track your net worth today so you know exactly where you stand and how much more you’ve got to go. You’re free to calculate the multiple based off your spending. But why not challenge yourself more? Spending is after tax income after all. Nobody I know on Financial Samurai spends more than they make.
Readers, what is your current net worth as a multiple of your average annual income over the past three years? If you are retired, at what multiple did you retire? What do you think is an appropriate multiple of income to retire?