My goal, for 2047, is about $3-3.5mil liquid Retirement Funds.

I have a two-part Excel workbook to track my progress toward goals and to project, at a point in time, where I will be relative to those goals.

The progress tab shows how much is in an account, the start/end timeframe for achieving the goal, expected interest, etc. It then calculates the monthly savings amount needed to hit the target in that timeframe. For the nearer-term goals, like a house, it helps that it shows the percent time elapsed vs. percent of goal amount saved – e.g., I’m ahead on my Emergency Fund but behind on my Down Payment Account, so any new income can be directed appropriately.

On the other tab, I have linked those same actual saving amounts, timeframes and expected interest, only here I include actual monthly savings amounts – and it projects where I will end up, at the “end date”, if I do nothing but remain consistent. So I know that in my house fund, from the “progress” tab, that I need $216/mo to get to my goal of $20K on time…but if I continue at $86/mo I end up with only $11K.

It definitely helps motivate me to “save more today”

If anyone’s interested, I could send it to Trent to post online and you can pick apart my methodology, or just use it as is.

When I remarked above that my net worth is more than twice the net worth this calculation thinks I should have, that includes the value of my house (about $350,000). Unless I sell and move someplace cheaper or take in a renter, that money does nothing to put dinner on the table. Well…except in the sense that not having a mortgage payment leaves more disposable income from SS and income off investments. Since 350 grand is pretty cheap where I live, downscaling will entail a significant cut in safety and lifestyle, or else I’ll have to move to Sun City, where acceptable housing is cheaper…because most baby boomers don’t want to live there. Similarly, the $10,000 value of my seven-year-old car does not help maintain my house, pay my taxes, or feed me. The inefficient local public transportation is used mostly by people who have had their driver’s licenses rescinded and as rolling shelters for the homeless mentally ill (recently I tried taking the bus to work: the 30-minute drive morphed into a grueling odyssey of 2 hours and 10 minutes!). So, sell the car, bank the proceeds, and use the $40/week in gasoline costs to support my eating habit? Not likely.

If you regard the car as an asset (questionable), my net worth is over a million dollars. But if you get real and calculate retirement income from liquid net worth, then you get a gross annual income of about $28,000, based on a 5% drawdown; at a more conservative 4%, that would be $22,400. Add Social Security of $10,320 p.a., and you come nowhere near replacing my $61,000 annual income.

The conclusion from that book is that having your own business is the way to wealth.

However, a successful small business is not necessarily very liquid.

Having a chain of small dry cleaners worth $5 million is very different from having $5 million in a diversified stock portfolio.

You probably want to think about liquid net worth.

This isn’t completely about retirement needs.

That’s a separate calculation/equation altogether.

This net worth equation is just a benchmark of sorts to see how you are doing, based on your age (while I agree it’s age-biased, it’s good enough of a general factor to use as a calculation).

The whole point is to provide a simple calculation, not a complex one. Something simple that ordinary, normal non-math-oriented people (like myself) can use in a pinch to quickly calculate what their net worth is SUPPOSED to be, and kick their butts into gear to save/pay down debt and accumulate a higher net worth.

For example, reading the millionaire next door, I was supposed to have a networth over $100k!! But I had just graduated from university, and with student debt, that was not possible (not counting car or my clothes/shoes/electronics as assets. Just pure hard cash and investments and gross income).

With Trent’s formula, my net worth should be -$39,000, which sounds more reasonable/realistic. At least I have a sort of benchmark to use to say: Okay, I’m at least keeping at the curve/mark/target net worth as I should be, considering my age (not taking into account my gender, background, the city I live in, and cost of living).

It’s not a magic number to use to calculate anything else, but just a benchmark to assess how you’re doing.

Just my 2 cents…

When someone is older and has a larger amount saved, say $500,000, if the account earned 7% ($35,000), he would have to have $115,000 in new savings to increase his net worth by 30% that year!

I prefer to calculate my retirement needs with an excel spreadsheet using the following factors:

(a)current savings/retirement plans
(b)% of my salary I can save each year (I am putting the maximum into a retirement plan
(c)number of years until retirement
(d) assumed rate of earnings- 8% to 9% for a mix of stock funds and bond funds (See his recent review on Lazy Investing)

That gives me the retirement savings I plan to have at retirement

(e)amount I would need in today’s dollars to live (my house will be paid off, but there is still property taxes, insurance, & repairs, and I am planning on higher medical costs)then add 3% to 4% expected inflation per year

to be conservative I plan on taking no more than 4% of my savings out each year to live on. If the results of (e) are less than 4% of the balance of my savings at retirement, then I am saving enough.

I enjoy your posts; you have such good content that is a model for my near-term blogging efforts.

My main point was that perhaps you want to share how you gain %30 year-to-year on your net worth? That’s worth some serious money.

Once you see the context it makes a lot of sense. For the younger people (which I’m among) you can take comfort if you are saving 10% or more and have decent earning prospects.

(This is also probably why the “e” shows up in Mitchell’s approximation, though I have not looked at it carefully; we don’t have pretty-print here.)

“Should be” for what purpose? If the Millionaire formula is age-biased, the bias is pretty bizarre. Sixty-nine grand would be off the charts for a 23-year-old fresh out of college. But for an old bat like moi, the formula’s result makes no sense: at 62, I should have a net worth of $378,200??? And in retirement, I’m supposed to live on…what?

My net worth (assets minus liabiities) is more than twice that, but unless ISocial Security bases my SS payments on my ex-husband’s earnings instead of mine, my post-retirement lifestyle will be much crimped. In either event, I will have to depend on Social Security to maintain my present distinctly frugal but still (modestly) middle-class lifestyle.

Your target should be to have no debt and enough dollars in savings that a 5% return on savings will provide you an after-tax income of your present net, absent Social Security. Where net retirement income is concerned, your net worth is less relevant than how much savings you have and whether you’re carrying any debt.

For a single person, I’d take $1 million dollars (giving you a gross passive income of $50,000, which would probably leave you with an adequate after-tax net unless you live like the Queen of Sheba) as a target for the age at which you hope to retire. Then subtract about 7% for each year of your age before that (since a balanced portfolio should grow at about 8% over time, this should give you approximately the amount of capital you need, at any given age, to achieve your goal by retirement). So, say you want to retire at 50. At 45, you should have $705,688 in savings. And so on, in reverse compound interest mode. This exercise seems to skew the target-age savings upwards as you move toward younger years, & it doesn’t add in your regular contributions to your savings plan. But that could be seen as accounting for inflation, since the the target figure and the figures that result are in today’s dollars. Someone who knows calculus could no doubt design a better reverse-compound-interest formula.

Those of us who are old enough to know for sure that Social Security will be around for the rest of our lives should regard SS only as inflation protection; those who are under about 45 or 50 should figure it won’t be there, unless we get some much smarter elected representatives than we’ve seen of late.

consider this formula?

Net Worth = ((e^(Age/8))/((e^(Age/22))*1.75))-5) * 20000

its adjustible and considers someone to be pretty solidly in the hole in college and slower to come out of it, but once capital is obtained and saved, it builds faster.

(20 (my age) – 27) X 48,000 / 5 = -67,200

And with my student loans and everything, my net worth is -$15932.76

If this formula is for real, I’m doing excellent!!

– Cheryl

Some financial people would go as far to say that you shouldn’t be concerned with the actual net worth amount as long as you’re debt free and saving at least 15% of your take home pay for retirement.

Statistically speaking, if you’re saving 1% you’re beating MOST of a America because the average savings rate is -2% because of all the consumer debt our country racks up. Becoming and staying debt free is one of the biggest keys to financial freedom and building wealth because you open up your greatest wealth building tool: YOUR INCOME.

Did I get anything (everything?) wrong?