MM Mailbag: How do I know if I’m on track financially?
I was reading over your website and the question that comes to my mind often is where people stand at various ages on average and where they should be. I’m talking about people that do well or that have played the finance game well. Not the average of the everyday American with extreme highs and lows skewing the number or those that have inherited money.
We live in a very affluent area and I always am wondering. I have read several different methods of how to figure out where we should be at age 40 and they all vary so much. And retirement-wise what is really considered wealth these days? 1 million? 5 million? 10 million?
– Beth from Alabama
Beth,
Thanks so much for the question.
We wrote a post a while back that provides a variety of data about average and median net worth by age, education, and even state.
But it may only add to the frustration you’ve experienced in seeing numbers that are all over the board. They’re all somewhat generalized in a pretty broad range because that’s the way the Bureau of Labor Statistics releases the data.
To add to that, it’s difficult to define what “wealthy” is because it depends on so many different factors and points of view.
Net Worth by Age
In any event, here is a table of net worth by age (from 25 to 70), including the median, 75th, and 90th percentiles.
This data is from 2019 which is the last time the Bureau of Labor Statistics released the data. It will be updated again the Spring of 2023.
You’ll notice the numbers don’t climb in a perfectly linear fashion. That’s because there’s such a variety of net worth’s and they don’t really depend on age as much as how people receive and use their money.
Generally speaking though the older you are, the higher your level of wealth.
Age | Median Net Worth | 75th percentile | 90th percentile |
25 | $2,600 | $18,830 | $59,900 |
26 | $1,640 | $49,830 | $74,600 |
27 | $9,200 | $58,910 | $159,030 |
28 | $6,000 | $61,810 | $179,830 |
29 | $34,250 | $107,800 | $213,300 |
30 | $29,270 | $126,510 | $268,950 |
31 | $20,800 | $77,605 | $197,510 |
32 | $43,980 | $89,050 | $182,950 |
33 | $34,900 | $136,750 | $245,260 |
34 | $59,460 | $181,001 | $378,600 |
35 | $49,080 | $165,600 | $389,000 |
36 | $62,150 | $206,170 | $488,000 |
37 | $25,805 | $211,900 | $757,000 |
38 | $84,700 | $238,100 | $570,000 |
39 | $67,890 | $358,050 | $1,136,200 |
40 | $101,900 | $253,900 | $631,980 |
41 | $110,501 | $357,900 | $822,700 |
42 | $133,900 | $327,500 | $821,500 |
43 | $127,750 | $253,000 | $1,068,900 |
44 | $172,600 | $539,400 | $1,037,570 |
45 | $98,915 | $360,400 | $713,700 |
46 | $160,850 | $853,000 | $1,700,800 |
47 | $133,700 | $436,700 | $1,877,540 |
48 | $234,200 | $637,400 | $1,843,400 |
49 | $148,500 | $365,090 | $1,323,000 |
50 | $112,100 | $341,030 | $948,300 |
51 | $168,400 | $519,800 | $1,190,200 |
52 | $135,200 | $374,900 | $1,071,700 |
53 | $225,700 | $644,300 | $2,730,100 |
54 | $219,600 | $652,000 | $1,471,410 |
55 | $176,100 | $644,690 | $1,544,700 |
56 | $122,430 | $651,000 | $2,975,000 |
57 | $197,100 | $711,700 | $2,953,100 |
58 | $259,600 | $658,890 | $4,281,250 |
59 | $223,530 | $560,200 | $2,086,600 |
60 | $245,780 | $706,060 | $1,772,240 |
61 | $303,600 | $977,000 | $2,596,800 |
62 | $229,110 | $608,100 | $2,564,500 |
63 | $160,200 | $472,690 | $2,390,400 |
64 | $234,500 | $807,300 | $1,778,000 |
65 | $281,200 | $794,300 | $1,898,000 |
66 | $314,390 | $777,600 | $2,223,600 |
67 | $284,700 | $861,600 | $2,205,200 |
68 | $242,000 | $726,380 | $2,112,050 |
69 | $315,700 | $867,700 | $1,537,500 |
70 | $338,250 | $882,100 | $3,359,100 |
Honestly, I wouldn’t spend much time here. Sure, it’s helpful for measuring your net worth against the broader population, but it doesn’t provide much insight into how much you need for the future you want.
It is also measuring net worth, which is a great way to keep score of your overall financial health, but may or may not provide an accurate picture of the actual income and expenses you need to live the lifestyle you want.
Ultimately, all that matters is you have a goal to end up with enough for you. It’s a waste of time trying to compare where you are with others because you may be seeking very different objectives.
What’s Your Number?
Instead of watching the Joneses, I’d start by estimating how much money you need to cover annual expenses for your desired standard of living.
To do that you need to calculate your number.
“What’s Your Number?” is the first question many financial advisers try to answer when they’re trying to formulate advice because it drives the math for the rest of their planning.
Essentially, “your number” is the amount of money you need to save in order to provide enough income to live the lifestyle you expect to live after you stop working.
Begin by estimating how much money you want to have available to spend each year when you retire. It may be more or less than you’re spending now.
Don’t forget to include fun things you want like vacations, boats, or RVs, and deduct expenses you may not have any longer like the mortgage or funding all the stuff your kids are doing.
Next, estimate any income you’ll receive from social security, pensions, or other sources and subtract this from your annual forecasted expense amount.
This remainder is the portion you’ll need to cover with income from savings and investments.
Finally, multiply this remainder by 25 and you’ll have a good idea of how much you need to have saved by the time you reach 65.
For example, if you want to spend $100k per year in retirement and expect social security income of $35k, you’ll need to save enough to provide the remaining $65k of income from other sources like 401(k)s or IRAs.
Multiply $65k by 25 to get your total goal savings (“your number”) of $1,625,000.
The 4% Rule
But why are we multiplying by 25?
If you read the post I linked above you’ll see a reference to a study that concluded retirees who withdrew 4.2% or less of their retirement savings annually were highly likely to have enough money to maintain their standard of living until their death.
4% is 1/25th of 100%, so if 4% is considered the safe withdrawal rate annually, then we’ll need 25 times that amount in order to reach the goal.
However, the study assumed a 30-year retirement. If you retire before 60, you should raise this multiplier to 30x expenses which is a 3.33% withdrawal rate. Retire in your early 50s and 33x or more would be a safer multiplier.
The study reached this conclusion by running a Monte Carlo simulation on every 30-year period for the American stock market since its inception.
A little further down in the post, there’s a link to a free Monte Carlo simulator I like called FireCalc. This site allows you to enter a number of variables and calculate your odds of success based on stock market performance since 1871.
Once you have your number you’ll need to do a present value calculation to back into how much you need today to be on track.
You can run a present value calculation using Excel or a freebie site like this one, (www.calculator.net).
Back to Beth
So, for a 40-year-old in the scenario we ran above, the present value needed to reach $1,625,000 by age 65 would basically be $0, assuming you’re saving $15,000 per year for retirement and receive a return of 10.67%.
For simplicity, I don’t factor inflation into my calculation, though you’ll need to account for it eventually. Instead, I recalculate annually to see if I’m still on track.
If my projected retirement expenses go up, I just recalculate and raise my number. Historically, my wages have kept pace or outpaced inflation enough that it hasn’t been too difficult to keep up.
If you want to include inflation, you’ll need to add some expected inflationary rate into your calculation. I’d suggest something around 3.5%.
The primary thing you’re trying to figure out is whether or not you’re doing enough right now to retire the way you expect.
You may find that you’re saving plenty or you may find that you need to do more. But either scenario is better than not having a clue and hoping for the best.
