I just read the article cited by MonkeyMama at
The article says, according to Fidelity, the average 401(k) account balance is $62,000. This lead me to feeling like I'm on a good track, being at age 25, with about $42,000 saved for retirement.
Then I thought about that pesky net worth (http://en.wikipedia.org/wiki/Net_worth) calculation presented in the book The Millionaire Next Door.
I haven't read the book, but, know from online information that it describes under accumulators of wealth (UAW), average accumulators of wealth (AAW), and prodigious accumulators of wealth (PAW).
To determine if you are a UAW, AAW, or PAW you apply the following formula:
Multiply your age times your realized pretax annual household income from all sources except inheritances. Divide by ten. This, less any inherited wealth, is what your net worth should be.
If you net worth is about equal to the number you are an AAW.
Try your own with the calculator here:
http://www.retireearlyhomepage.com/millbook.html
And more info about the book here
http://www.washingtonpost.com/wp-srv/style/longterm/books/ch...
My case
Age: 25
Pretax annual salary: $76,600
Pretax annual other income: $3,000
Total pretax annual income: $79,600
Result for AAW: $199,000
With a net worth of about $33,000 I rank as a UAW.
Bummer!
It is fairly discouraging to see that I'm a UAW and to notice that my net worth isn't even close to an AAW for my income/age. So much for feeling like I'm on the right track...now I just feel a compelling need to save. I want to transform myself into at least an AAW, but it seems like there will be a long road ahead.
How does everyone else rank on the UAW, AAW and PAW scale??
January 29th, 2007 at 08:01 pm 1170100863
January 29th, 2007 at 09:33 pm 1170106388
I actually rank really high, my calc shows $220k, but our net worth is about $420k. Without our home equity it may be $150k or so, so then we should be way behind. I know the house is not certain and all, but us getting into a house was crucial to wealth and we bought smart hoping for appreciation, I don't think that should be completely discounted. Especially since we can move anywhere just about and pay cash for a house.
Anyway, looking at these calcs I think a more beneficial way to look at them is do the same calc for 5-10 years down the road, estimating what your wage would be.
If I do this my equity should be $340k at the least at 40, assuming some wage growth. That is a $120k increase. Actually, I have a 5-year plan to increase my net worth by about $120k in just 5 years, assuming my current wage, so I may just catch up. I think when we are younger these calcs work better then we look at where we should be down the road and if we are on track! Lord knows I hardly know anyone else my age near the net worth we have.
January 29th, 2007 at 11:25 pm 1170113135
January 30th, 2007 at 01:50 am 1170121817
May 7th, 2008 at 06:52 pm 1210186329
Unfortunately the formula is skewed toward the authors' target market, that is to say the Baby Boom generation. It is almost completely inaccurate for people under age 40, because it assumes people are earning and saving money every year of their lives. The years a person lives without earning (childhood) are factored into the equation because of the emphasis on age. The non-productive childhood years have a massive impact when you're 25, because if you start earning at age 20 your non-productive years are 80% of your lifetime. By age 50, the non-productive years make up only 40%. By age 70, the non-productive years make up only about 29%. So the impact of all the unproductive time we spend doing things like crawling or learning to talk instead of earning an income have less of an impact after we've had a chance to make up for them.
To illustrate, according to the formula a 15-year-old who earns $5,000 a year from a paper route and occasional babysitting should be expected to have a net worth of $7500 to avoid being labeled a UAW, yet that amount probably exceeds his lifetime income. Even if he saves every cent he brings in, he's a UAW through no fault of his own.
If you go to college you may have a much higher income upon graduation, but it works against you in the UAW/PAW calculations because the equation assumes you've had that salary since birth. You are also older than someone who starts working after high school. The authors do take that discrepancy into account by pointing out that many entrepreneurs who don't go to college have an advantage in that they start earning a few years earlier. They also seem to assume that a person's income is stable or consistent over a lifetime, which may have been accurate for the Baby Boom generation but is no longer a realistic expectation for the rest of us.
It's almost impossible to earn PAW status before age 55 unless you start earning early, keep your income LOW, and are extremely frugal.
June 3rd, 2008 at 03:47 am 1212464877
Fortunately I met my girlfriend at the age of 30 and she encourged me to start saving and buy a house. Now I'm 37 and have since bought and paid off our house, built and sold a business and now have a net worth 5 times my AAW net worth figure. Thanks hon.
March 1st, 2019 at 10:11 am 1551435063