This post will provide a guide for how much your net worth or savings should be based on income. Too many people go through life just winging their finances. No wonder why most people end up in old age wondering where all their money went.
If you've been making $500,000 a year for a decade as a 40 year old but only have a $1 million net worth, you're probably a donkey with some serious financial issues.
If you're making $80,000 as a 30 year old but have a $500,000 net worth you are a hero who is on their way to bubbles and unicorns!
I've written about The Average Net Worth For The Above Average Person that provides charts on where highly motivated people who want to achieve financial independence should be.
The only problem with my analysis is that it doesn't tie income levels specifically in the charts. This post will bind the inextricably important link between income and wealth to ensure as high a chance of financial freedom as possible.
To create a good net worth guide based on income can be very tricky based on variables such as how long someone has been making X income, the return on investment, and the state of the economy.
Hence, a more conservative assumption is to replace net worth with savings. Let's first understand the current state of the world and break down our assumptions.
Financial Assumptions For Net Worth / Savings To Income Ratio
Below are the financial assumptions for how much your net worth or savings should be based on income.
Low interest rate environment.
Interest rates have been coming down since the 1980s and have reached a level where it's harder to get much lower. The effective Fed Funds rate is at 0% – 0.25% and the 10-year yield is around 1.5% in 2021. These are near record low rates.
Low interest rates mean low risk-free returns. This is terrible for savers who are conservative in their investment strategy. However, being conservative is what we should all be once we've built up a large enough financial nut that spits out a perpetuity of passive income.
The main good thing about a low interest rate environment is that we can all refinance our debt. Student loans and mortgages should all be refinanced. You can check the latest rates with Credible for free, my favorite lending marketplace.
Elsewhere, auto and credit card interest rates should be declining as well.
Life expectancy extends to 85 for men, 90 for women.
We don't know whether we'll live longer, but we should conservatively assume than the median life expectancy of 78 currently is too low. The longer we assume we'll live, the more money we need to have in retirement. It's better to end up with too much than too little because we can always live a will to give our money away to those in need.
Retirement age no later than 65.
It would be a crying shame to work for 43 years after college and only live until age 78 wouldn't it? Age 65 is the maximum age for work in my net worth by income model. Ideally, we all reach financial independence much sooner and experience the luxury of the “one more year syndrome.“
Savings rate is at least 20% with the ultimate goal of saving 50%.
You can't grow your savings and investments aggressively without having a commensurate savings percentage. The goal is to build your financial nut so large that it starts saving more for you than you can save on your own. Ideally everybody should strive to save 50% of their after tax income or more by age 50.
The easiest way for most people is to see if they can just save one of their bi-weekly paychecks every month while maximizing their pre-tax retirement plans. Here is a great chart on how much savings you should aim for by age using the expense coverage ratio concept.
Remember this motto, “If the amount you're saving each month doesn't hurt, you're not saving enough.”
There are no income-producing breaks.
This is a difficult assumption because so many of us will take time off between jobs to go travel, spend time with family, or start a business. I'm a prime example who has extricated himself out of the work force to give a go at online entrepreneurship.
My absolute savings amount per year is much lower, but my savings percentage continues to be high as I adjust my lifestyle and spending habits. Only a small minority of people take work breaks for longer than two years.
The trend is up and to the right for economic growth.
There have always been gains in any 20-year period. With a more collaborative world and the advent of the internet, productivity gains and economic growth should continue.
Surely we will see multi-year bear markets again as that is the nature of a cyclical economy. But structurally, the long term trajectory is higher thanks to demographics, inflation, technology, and productivity. All this said, I don't assume any returns except for end where I allow for +/- 25% changes to the final ratio.
Net Worth Or Savings By Income Guide
I was originally going to make this chart very complicated by including an after-tax savings rate column, growth rate percentages, effective tax rate assumptions and so forth.
Instead, I've decided to simplify the chart to highlight a net worth multiple of income goal by age in five year increments. You will also see hypothetical net worth (savings) amounts by age based on $50,000, $100,000, $150,00 and $200,000 income levels.
Some Takeaways From The Net Worth Targets Guide
1) Focus On The Multiples
The chart is designed to work on any income level above the poverty line. The examples of $50,000, $100,000, $150,000 and $200,000 income levels and their respective amounts are there to provide visual guidance of what could be. If you're used to making $50,000 a year for your working career, then you should be use to making a similar or less amount during retirement. Same goes for those who make more.
2) Calculate Your Own Multiples First
It's better to be conservative and calculate your individual target net worth in case something happens to your relationship or in the event you never find anybody. If you are married, then simply calculate your net worth targets based on your combined income.
3) Each Persons Lifestyle Expenses Are Different.
This chart isn't a one size fits all net worth to income chart. Some people are happy to live very spartanly in the middle of nowhere making it unnecessary for them to have such high multiples. My chart is intended for folks who want to live above average lifestyles without having to worry much about running out of money living in more expensive cities. You may shoot for a higher multiples as well.
4) You Can Expedite Your Net Worth
By simply increasing your savings amounts, making more money, and investing in profitable assets you have the power to increase your net worth faster and retire earlier if you choose.
Let's say you make $50,000 a year and have a target of $1 million in net worth by age 60. According to the chart, if you can find some way to increase your income to $200,000 through multiple side hustles and maintain your savings/investing habits, you will save 20 years of work and retire by 40. Easier said than done of course, but the possibilities are there.
5) The Exit Multiple Target.
Once you hit about 20X your annual gross income as your net worth or savings figure, you can seriously start thinking about retiring or doing something else more enjoyable.
You will have to contend with various other assumptions including whether you include your primary residence in your net worth, whether you still have a mortgage, and if you have alternative streams of income.
My hope is that everybody works on passive income streams during their wealth accumulation phase so they don't need as much or any income in retirement.
Net Worth Or Savings Target Guide Conclusion
It's important to have some idea of target net worth figures by age to kee on course. There are countless stories of people making huge salaries only to piss it away on frivolous things and end up with very little to nothing.
I encourage everyone to have around 10% of their net worth in risk-free assets just in case everything goes to hell. Things did go to hell in 2000, 2008-2009, and 1H2020. Black swan events are much more common than we all think!
Continue to actively track your net worth progress a couple times a year. Targets will help you adjust your finances accordingly and increase your chances of reaching your goals much faster than others who do not bother. You should also consider calculating your net worth by your realistic living expenses to come full circle.
While I was working I had a target of reaching a net worth equal to 20X my average income by age 40. Instead, I left the workforce with a 15X multiple at 34 because I figured out how to raise my multiple to 18X in a matter of months by negotiating a severance package after 11 consecutive years at one company. Four years later, my severance package is still paying out.
If you can sustain a net worth amount equal to at least 20X your average annual gross income, you're going to feel great in your post-work life. Just don't get too complacent. The bull market can easily giveth and taketh away.
During my time away from work since 2012, I've been methodically writing on Financial Samurai. Not only is it fun to do, but it also earns additional income to help take care of my family or make additional investments. Find something to retire to, not away from.
Achieve Financial Freedom Through Real Estate
One of the best ways to boost your net worth by income is to invest in real estate. Real estate is my favorite asset class because it is tangible, less volatile, provides utility, and generates income.
Stocks are fine, but stock yields are low and stocks are much more volatile. The -32% decline in March 2020 was the latest example. However, real estate held steady and appreciated in value then.
Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I've personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.
Recommendation To Build Your Net Worth
The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online tool which aggregates all your financial accounts on their Dashboard so you can see where you can optimize.
One of their best tools is the 401K Fee Analyzer which has helped me save over $1,700 in annual portfolio fees I had no idea I was paying. You just click on the Investment Tab and run your portfolio through their fee analyzer with one click of the button.
Finally, check out their newly launched Retirement Planning Calculator. The calculator uses real data you've inputted to calculate using a Monte Carlo simulation model what your retirement future might look like.
There is no better free online tool that has helped me stay on top of my finances more than Personal Capital. It's important to aggregate all your accounts to get an entire overview of your net worth to make proper changes. It only takes a minute to sign up.
Updated for 2022 and beyond. Net worth or savings by income post is a Financial Samurai original.
Interesting post! I was wondering what investment return you assumed for these multiples. If you assume a 5% return from age 35 to 65, that gives you a 4.32x total return on your savings at 35. This means if you hit your 5x income multiple at 35, you basically don’t have to save anymore—which feels wrong. What am I missing?
Hi – I’m a 28 year old with 1x my income saved but I’m struggling to understand your assumptions behind the 2x net worth multiple at age 30. From 25 to 28, the annual CAGR is 26%, but then it jumps up to 41% from 28 and 30. Just curious why you chose age 30 vs 31 because if you change it to age 31, it’s a much smoother 26% CAGR between ages 25 and 35. At the same income, it’s hard to suddenly save much more and in two years, you shouldn’t expect your investments to be such a large growth driver.
I love your chart but have just been struggling with that one piece and the assumptions behind it.
Question about this chart. Is the income what we currently earn? Or what we need to have to cover expenses when we leave the workforce?
I got a late start to savings. I am 50 and my income has increased dramatically in the last few years to $200,000+. I have done a good job of not increases expenses as my income rose. My net worth (not including my house) is $700k. Since my income has risen, I’ve been saving 30-40%.
According to this, I’d need $3mm, and I’m really behind. But with a more frugal lifestyle, I could stay in my current home and be happy living on $50 – $75k, which would put me toward a goal much closer to what I currently have.
One of the challenges I have with basing retirement living on a percentage of current income is presumably once I get to “retirement,” I’ll have my nest egg and won’t need to plow so much money into savings. Does that make sense? Or am I off base?
My comment isn’t really one of the math but more of the level of comfort one wishes to live and does it make sense to quit a job you like just because you can.
I retired from the Army after 22 years 18 months ago I was 43 years old. I took a post retirement job and my income doubled. Since I retired I have never spent more than my military retirement on my living expenses. I save 35% of my post retirement jobs income. I spend about another 40% on of it on paying for my sons college he is currently a freshman. I have spent the remaining amount on various small investments.
I have about $300,000 in cash and stocks and another $150,000 in free and clear property. I have two rentals that net about $900 a month as well.
My goal is to get to get to around 1 million by age 56 as I would then be eligible for another retirement. If I happen to make it to 65 I would get SS and my wife would also get half of my SS amount as well.
So if you made it this far here are my questions.
I could save 50% of my income now and 70% once my son graduates college.
But what is the point if I plan on working until age 56 anyway?
Does it make sense to quit a job because you can?
If you genuinely liked your job would you quit because you don’t need the money?
Paul
You can add your annual Military Retirement by the government to your other assets to determine your actual Net Worth?
Use Sam’s stated approximate equation:
Example: 26,000 divided by .0255 times 1 equals $1,019,607.84.
This is the current estimate for the government holdings that generate your annual lifetime retirement pay.
The same can be done for other pensions and SS once you begin receiving them.
Golden Parachutes!
Sam please feel free to correct any details I might have misrepresented.
Best regards
Chris
This is confusing to say the least. The other day I read that the Majority of Americans have virtually nothing in their savings accounts and now I see this chart which states that my net worth should by over $1Million at age 42 if I make 100k a year. I don’t know a single person who has that net worth that high making less than $300k at the age of 40 so this chart is a head scratcher. I have a net worth around $300-330k depending on what my homes are worth, I have $115k I checking and savings, 60k in paid for vehicles, 70k in an IRA am I a total loser for having 1/3 of what I’m supposed to have based on your chart?
Hi Chris,
Thanks for reading my post. First of all, you aren’t a “total loser.” Financial Samurai is a place where readers are very focused on their finances compared to the average citizen, and therefore take more action to make more, save more, and invest more.
It’s hard to fathom the power of compounding returns, but that’s exactly how someone who makes $100,000 a year but maxes out their 401k and invests an additional 20% of their after 401k/after-tax income in the S&P 500 can get to $1M by age 42.
See: The Inflation Interest Rate Paradox: Why You Must Continuously Invest for an example of how 4.85% a year turns into an 81% return in 11 years.
Besides aggressive savings, a proper asset allocation, and taking advantage of various asset classes like real estate investing, alternatives, venture debt, private equity, and working the gig economy, there’s also side hustling by building online income as well.
Do not rely only on your day job to make money. Build passive income to have multiple rocket boosters to achieve financial freedom sooner, rather than later!
Sam
I don’t think it’s unreasonable if you’re committed to FI. I’m a 28 year old with a $130K Net worth due to a Savings Rate of over 50% and have made an average of $65K/year for the last 5 working years (starting at $30K and now cresting $100K). 5 years ago, I had a negative Net Worth.
With an average an Net Worth increase of $5K/mo. currently, I expect to be near $230K by 30. By age 40, I should be right around $830K. This doesn’t take into consideration the increased dividends/compounded interest and side-Real Estate Hustle.
Ultimately it depends on lifestyle and avoiding lifestyle inflation. I don’t own a vehicle – and will delay adding that in to my life as long as possible – I prefer riding my bicycle anyway. I do own a small condo – one that’s just 8% of my income. My highest lifestyle expense is Travel and Food (foodie here, which I really should cut back on but I live in a city with fantastic restaurants!).
I don’t keep up with the Joneses and people around me (co-workers, neighbors, friends) have no idea what is my Net Worth.
Just another observation this time from an (embarrassed) high income guy: the tables don’t take into account the extra tax burdenof high earners. At 50k you get to keep almost all of it. At 880k I get to keep only 520 or so. So my income is 17x more but my after tax is only 10x. This is the redistribution part.
I’m 23 years in(started working at 34) with only 2x. What happened? College for 6 kids(950k), cars for 6 kids, a divorce(1000k, 200k lawyers), having to sell a house at a big loss(300k), caring for elderly parents, poor investment choices. Still 13 x on the table would place me with an 11 million dollar fortune. I’ve brought home 12 million total, after tax.I guess the power of compounding, but still.
What I can say is, people that can get to a million on 50k a year are very rare: frugal and great investors, and perhaps with above average luck.
Enjoy your posts!
I agree with striving, why don’t the tables discuss percentages/multiples of take home pay. In California after taxes and benefits I keep less than 50% of my gross income. It makes applying the samurai’s tables mighty difficult
On the surface that’s a valid point; however, they are unbiased metrics and you will always be subject to those taxes and costs as long as you live in California (or other high cost areas) so while it may be difficult, it is a reality to consider.
Once retired, if you live in a high tax area, your costs will sill be high. It’s sort of the same principle as not including your primary residence in your net worth, you have to live somewhere.
On the flip side, I personally believe that it is important to plan your retirement around your annual costs instead of one’s gross income. Someone that makes $200k, but lives on $100k and saves the rest will likely have an easier time retiring than someone that lives on $150k or whatever your post tax income for two reasons 1) they are growing their net worth faster through higher savings 2) they have lower cost expectations.
The woman I worship,I will ask her for enough just to buy myself a burger and a coke because I know the rest of the finance’s are in her hands as I want it to be.she is my queen and I know she will use the best judgment.
Just wanted to say thank you very much for sharing this Multiple Theory!
As a 27 year old who has been out of college for 6 years, I’ve come to find that life is rarely constant. From moving to a new city, to changing companies, getting a promotion, buying a condo below my means, and having a fair obsession with frugality and minimalism to achieve FI independence at an early age, I’m always trying to compare and gauge where I stand. My annual salary has fluctuated every single year for my 6 years in this working world and now that I’ve found success in a sales career, I know this will always be the case. Unfortunately many of the resources I’ve found offer advice based on annual income.
However using the Multiple Theory, I was able to find the average annual income over the last 6 years and set an assumption for the next 3 to at least have an idea what number I should be aiming for at 30 – thank you!
Here is a simple way to track the total net worth as a percentage of varying income through the years. It’s based on very simple discounting of present value to future value.
Assume your income in a specific year was X. Now count how many years have passed until now. Call it n. Discount your income by 3% (average rate of inflation). So the future value of your income for that year was X * (1.03)^n.
Do this for all years. If you don’t remember the income, subscribe to the social security website and start from there. Do not forget to add any 401K match etc., because it’s part of the income.
Add all the flows. For the current year, n is essentially 0 so you are adding the current years income as it is.
Now, get your net worth (call it Y) and divide it by all the income flows through the years. This fraction (it could be > 1 for massive investment gains, but it’s very unlikely) truly represents how much of your income you have been able to save and grow (in investment gains) as a percent of your income through your life.
Mine came up at about 26%. Not too great, but not too shabby. I haven’t really aggressively invested (my mistake) but have been fairly frugal, was debt free (except mortgages and car loans) and did not make any major financial mistakes. Since my investment gains were almost nonexistent, 26% is kind of my true savings over the years.
To put it in a pie chart:
– 26% savings
– 30% taxes (approximate estimate)
– 44% expenses and debt service.
As years progress, I hope the expenses and debt services number goes down and savings increases. For the current year only, our net worth rose almost 50% compared to our gross income, so the trend is definitely changing.
Why not keep things simple and just link up all your accounts with Personal Capital, and have them track your net worth for you automatically? Money needs to get out of the way, so we can spend time enjoying our lives!
I do link up all my accounts in mint and track the NW. However what I was interested in knowing was “how much was I really able to save” as a percentage of my income. That’s what this post was about.
Yes, a guideline like “your saving should be 3X your income by age 40” is great…only the incomes are not static. Mine certainly is not and has been increasing rapidly. 35-45 in general would be an income growth phase in someone’s life. Hence to track how the net worth is comparing in proportion to the income, I would like to use a strategy like the above.
At the end of the day, the NW is income – taxes – expenses +- investment gains. If I can picture this equation clearly, it can tell me how frugal/savvy investor I am.
I don’t know if I read about something like this on your site or somewhere else, where they were talking about UAW/AAW/PAW (Under/Average/Prodigious Accumulator of Wealth) using an archaic formula (income * age/10). It will be interesting to replace that with a similar method as above.
That sounds like formulas from the Millionaire Next Door book.
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We’ve been tracking and growing our net worth aggressively for the past 4 years. It’s amazing how it keeps growing on its own, even if you have a month with low income. We’re projecting to get it x25 our projected expenses and become financially indepedent in less than 4 years. Thanks for sharing the chart.
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Thanks for always making us examine something as basic as net worth from different angles: hadn’t thought about doing both income and expense comparisons.
It bothers me when I can’t come to absolutely accurate numbers, especially in a net worth calculation. The DB pensions really annoy and throw me off. You’d recommended taking the annual pension total and dividing it by 3~5%. I can’t get myself to use the numbers, as even though they are fairly good rule of thumb values, they aren’t precisely accurate. I’d go with a number calculated by an actuary but I’m not going to waste money on an actuary to do the calculations. I suppose I’ll just continue using purely contributions when calculating in net worth month to month.
FS. Thanks for all of your fantastic articles. I have just recently developed an interest in investments and planning for retirement since I have gotten married and now have a little kiddo. We got married 4 years ago (I was 26, she was 20). Up until about a year and a half ago I was only making approximately 25k/year while going to school. My wife was making minimal income as a math tutor while going to school as well. I just got a fairly decent job making 52k/year now and she earns 46k/year at her new job. In the last 4 years we have accumulated 38k through our 401k’s and Roth IRA. We also have two houses, one with about 10k in equity and another with approx. 50k in equity. We only have about 7k in liquid cash. I want to begin CD laddering at some point because it seems like a great investment method; however, even someone with limited experience such as myself can draw the conclusion that this would be foolish at this time due to the pathetically low rates, so that option is on the backburner for now. I am contributing 15% of my income to my 401k (match of 100% up to 4%) and my wife contributes 6% with a 50% match up to 6%). She is planning on leaving her job next April to take care of our baby and work on her own blog as well as tutor for math again. I honestly don’t really know what I’m doing when it comes to investments but I know I am way behind when comparing where we are at currently to your various tables. How do you catch up? Is the CD option a good one now or should I wait? Do I contribute more to my 401k or max my Roth IRA? Also, is the PC consultation still free at this time? Thanks Sam.
Had net worth $50k in 2003, finishing training. Now net worth is $2.5M. Married, and our Medicare wages have averaged $225k over the last eleven years. Now our income is higher, $325k. We save 40% every year and are good investors. Our goal is $3.5M by age 45 and partial retirement at that time. We spend about $100k per year. Are we on track?
Sounds good to me. I’d figure out how long it would take you to get to $5 million based on your savings and wages due to inflation.
At that point we wouldn’t draw down but we wouldn’t save any more, just work enough to pay for current expenses and health care, and bump up my social security earnings a little more to definitely clear the second bend point in pia. So if we got a 3-5% real return on $3.5 million from age 40 to 60 we’d have $7 million real. Then from 60-70 we’d defer taking social security and convert to Roth accounts some of our pretax accounts til RMDs kicked in at age 70.5.
One can always work more but at some point the whole point of being an early and aggressive saver was to be able to cut the strings a little earlier.
Good website, nice take on the financial world.
I’m 29. Living in Los Angeles, CA. Liquid cash of $730,000 (I’m hoping to reach the $800k mark at the end of this year). Hopefully on a positive track here. Net worth of around $1,000,000. Unfortunately, I don’t think this is the right way to go, and would like to start investing and diversifying. I have a sigfig and Personal Capital account but have never utilized their financial advisor. Any advise on where to start?
MJ,
That’s a lot of money. Is it all in liquid cash? No 401k investments or anything?
If you are with PC already, might as well get a free consult. Tell them Sam Dogen from Financial Samurai sent you.
Interesting read and comments. I always wonder about these things on both an absolute and relative scale. In evaluating your ratios I think you need to measure the different elements differently. Simply put, your net worth multiple should be based on a multiple of your expenses to help you evaluate when you can feel comfortable making a change. However, you should also monitor your savings rate as a percent of income because that helps you establish if you are doing a good job with saving your income or not.
A third thing would be net worth growth rate. That will help you establish a combined measure of your savings rate, and the performance of how you are distributing your savings. Between those three things you should have all you need to know where you stand on a relative scale.
Actually doing well still takes discipline.