What Is Targeted Net Worth?

You should have a net worth target that you want to achieve based on your age and income. A targeted net worth is like a GPS that will help guide you on your personal financial journey.

Not only that, net worth targets will keep you motivated and focused on financial freedom.

You don’t want to be one of the people who wake up in their 50s and start worrying about retirement. Being proactive and setting a path when you are young can help you reach your retirement goal. Who knows, you may even wind up being able to retire early.

This post will cover targeted net worth, how to calculate it, and why you need it.

Your Net Worth

Net worth is a simple calculation that involves subtracting all your liabilities from all your assets. The leftover number is your net worth.

Your net worth tells you where you are in your financial journey.

The higher your net worth, the more assets you have compared to debts. As such, a higher net worth is positive.

Tracking your net worth over time is a good way to ensure you are saving and investing enough money to grow your wealth.

However, just seeing your net worth increase doesn’t provide all he information you need. How much should your net worth be? Should it increase as you age? How much should it increase as your income increases?

To answer these questions, you need to have a targeted net worth.

Targeted Net Worth Formula

Targeted net worth tells you what your net worth should be. There are many formulas out there to guide you. One of the most commonly used comes from “The Millionaire Next Door”. It is one of the 20 financial ratios you need to know on your financial journey.

The targeted net worth formula uses age and pre-tax income to give you an estimate of what your net worth should be:

Targeted Net Worth = Age x (Pre-Tax Income / 10)

If you make $200k and are 30 you would want a $600,000 net worth. But if you are 50 you would expect a $1 million net worth.

Similarly if you are 30 but only make $50,000 a year, you should target a net worth of $150,000.

Targeted Net Worth For Different Ages & Incomes

Below we provide a table with different targeted net worths for different ages and incomes:

This is a good rule of thumb and a simple calculation. However, it works best when you are in your prime working age of 30 to 55 years old.

The above formula tends to overstate your net worth target at younger ages and understate your net worth target for older ages. Again, using the 4% rule, the income at retirement in the above table would result in:

When The Targeted Net Worth Formula Isn’t The Best

The above targeted net worth does tend to understate your target in later years and overstate your target in younger years.

For example, if you are only 25 years old, you likely have low or even negative net worth due to low working years and generally higher debt. If you graduate with the average student loan debt of ~$35,000 at 22 and make $50,000 a year, you likely haven’t had ample time to build up assets.

However, the formula says you should have $125,000 net worth already.

Similarly, as you approach retirement you should be at a point in life where you are really building a nest egg. A 60 year old who makes $100,00 a year would get a $600,000 net worth target. But using the 4% rule, that is only $24,000 a year of retirement income. After 35 years of working and saving, you should have more than $600,000.

Luckily, there are other ways to calculate your targeted net worth that provide better numbers.

Alternative Targeted Net Worth Formulas

There are 2 useful alternative targeted net worth formulas available to us.

• Targeted Net Worth Discounting
• Target Net Worth Expense Multiplier

If you use the targeted net worth discounting method, you start with your retirement target amount. Then you discount that amount backwards at an assumed rate of return.

The target net worth expense multiplier takes a look at your expenses and uses a multiplier to set your net worth target.

Targeted Net Worth Discounting

This is the more complex option but does give you the most individualized results. The steps involved are:

1. Estimate your annual expenses in retirement
2. Calculate your target nest egg
3. Discount your targeted nest egg back to your age

First, estimating your annual expenses in retirement. You can look at your current spending and strip out any of the expenses that won’t be there in retirement.

Or a common rule-of-thumb is to use ~70% of your current expenses as your annual retirement cost of living. But this ignores the cost of inflation. We think a better estimate is to take your current expenses multiplied by:

• 75% if within 5 years of retiring
• 80% if 6-10 years away from retirement
• 85% if 11-15 years away
• 90% if 16-20 years away, and
• 100% if more than 20 years away.

So if you spend $60k a year and you are 10 years away from retirement, you could estimate your retirement expenses to be $48k a year ($60k x 80%).

Next, you need to calculate your nest egg. The most precise way to do this is to project out your expense, after inflation, and then discount back those future expenses to your retirement date. If you assume you live to 90 and retire at 65, that is 25 years of projected expenses. You start at $48k in year 1 of retirement and then year 2 would be $49,440 based on a 3% inflation. Age 90 you would have over $100,000 in expenses.

You then discount this number back to your retirement date using your expected return. If we use 5% return, then your required nest egg is $1.0 million.

Lastly, you continue to use the time value of money and calculate how much net worth you should target at each age to achieve your goal. If you assume you can earn an 8% return on your retirement funds and are 10 years away from retirement, you need around a $460,000 net worth at 55 to hit your target.

This is a more accurate method, but more calculation intensive. And this method requires you to make an assumption on both inflation and your personal expected returns.

Target Net Worth Expense Multiplier

A second alternative is to use an expense multiplier for your targeted net worth.

You use the same percent of retirement expense as shown above, but add a simple multiplier on it to get your target net worth. (70% if 5 years from retirement, 80% if 6-10 years,…100% if more than 20 years away).

There are many versions out there, but the one that we like is:

• 2x your expenses at 25 years old
• 5x your expenses from 35 years old
• 10x your expenses from 45 years old
• 15x your expenses at 55 years old
• 20x your expenses at 65 years old

Again, if you are 55 years old and spend $60k a year. You would calculate your target net worth by:

1. Take 80% expense multiplier x $60k for a $48k starting retirement expense
2. Take $48k multiplied by 15x expense multiplier for a $720,000 net worth target

This method is easier to calculate once you have the 2 adjustments.

What To Do With Targeted Net Worth

You know your net worth and you know your targeted net worth. But what do you do with this information?

Depending on how your net worth is comparing to the target, you need to adjust your behaviors.

• If you are below your target, you need to find a way to spend less and save & invest more
• If you are above target, you may start considering the option of early retirement or a semi-retirement in your future.
• If you are on target, you can consider trying to get ahead of target to build a buffer.

But knowing where you are in relation to a reasonable target is a good way to know if your current plan needs adjusting.

The Final Word

Tracking your net worth is a great first step. It is made significantly better if you also have a targeted net worth so you know how your progress is measuring up.

We provided 3 ways to calculate a targeted net worth using 1) Target Net Worth Formula, 2) Target Net Worth Discounting Method, and 3) Target Net Worth Expense multiplier.

Each method can be calculated fairly easy in excel and will give you 3 measures of what your target net worth should be. But the important point is to choose a target net worth method, make a plan, and stick to it.

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