So you have some savings socked away (or not, oops), but maybe you're wondering
how it compares to others of your age and income, or maybe you want to know if
you'll be able to retire on that amount of savings. (Twenty-two-year-olds are
allowed to think about retirement savings, right?
:) ) I've done a bit of
reading on the subject (though, notably, I've not read the recent "The Number"
books out there). Below are two formulas I've found for estimating expected
My opinions of these formulas reflect the fact that I'm new employee in the workplace and thus my "expected net worth" calculations are very susceptible to certain assumptions made by the formulas.
A Very Rough Formula
I first came across the notion of "expected" net worth while reading The Millionaire Next Door by Thomas Stanley and William Danko. (The link is an Amazon Affiliate link, FYI -- full disclosure and all that.) In their book, they suggest the following formula to calculate your expected net worth:
expected net worth = (age)(gross income) / 10 - inheritance
(Normal mathematical precedence rules apply.) So they're saying that inheritance doesn't count, for one thing; your expected net worth is how much you have contributed, not how lucky you were that a rich relative liked you and kicked the bucket. Fair enough.
What I dislike about this formula, however, is that it's very wrong for youngins who haven't had a chance to earn much money yet. According to the formula, I should have a net worth of $44k by now. But I've only had 3 summer jobs so far! How in the world does it make sense for any 22-year-old but a college entrepreneur to have had a chance to amass that kind of net worth? Especially considering many college students will have a negative net worth from student loans and/or credit card debt until they hold down their first full-time job.
They don't give an explanation of how they derived this formula, so here is my own interpretation. Most personal finance books and blogs advise you to save at least 10% of your gross income. (The more you can put away, and the smaller the percentage of your income your can comfortably live on, the better.) So at 10% savings goal would explain the "(gross income) / 10" term. Multiply that by each year you've been saving, and don't count inherited money in the total. The formula overstates how many years you've worked and it doesn't take into account compound interest. Perhaps Stanley and Danko hoped the over- and underestimates would balance out?
To be fair, the authors do state that they have a super-duper fancy formula they use in their own research, and that this formula is just a quick-and-dirty version. Still, why do they not say "working years" instead of age? If I claim I've worked an entire year at my gross income (which I haven't), I'm suddenly above their "expected" value. If you're more like whatever their typical case is, then perhaps this formula may still give you useful values. (These shortcomings are also discussed on Old Niu's blog.)
A Better Formula
adult years = age - 20
expected net worth = (adult years / 240 + 0.1)(adult years)(gross)
Change the adult years calculation if you started working at an age significantly different from 20. I used the formula as-is, and the number it gives me still seems reasonable. YMMV. This second formula was also presented without an explanation of derivation.
For example, this formula says my net worth should be 0.217 times my annual gross income, or $4.3k. This seems much more reasonable for a 22-year-old to have accomplished. I have no sense of how much an older person with a higher income should be expected to save, so I can't comment on how well this formula or the Stanley and Danko one works for other demographics. (But do check out MSN Money's article for some median figures of different age groups.)
Note that, technically, the Marotta formula isn't meant to show your net worth. It's meant to say how much you should have saved by the time you retire (they assume at 72) in order to live off your savings at your current income level. Think of this number, then, as a minimum expected net worth; you may well have other investments and assets that push your total net worth higher by that age.
Neither of these formulas cope well with people whose income is currently in flux. Obviously, a more advanced analysis would be needed to take each year's individual gross into account. But if you're looking for ballpark figures, plug your age and income in and see what comes out. In any case, the end result will likely be the same: save more, spend less.