Throwing retirement savings factors out the window
The Millionaire Next Door suggested your expected net worth should be about 10% of your age multiplied by your gross income. Example: Net Worth = (Age 20 x 0.10) * income.
So, that formula looks something like this (gross income assumed):
|Age||Gross Income||Net worth|
While an interesting exercise, this retirement savings factor means nothing – other than some target it might offer some savers. Sounds like I’m not a fan of this target eh? You’re right.
This is because we’re all different. We all have different financial circumstances throughout our lives and just because someone “says” you should have a certain amount of net worth doesn’t mean squat (and you should).
For example, most 20-somethings would be fortunate to be earning close to $50,000 per year by the time they are age 30. Even if they earn that, or more than that, most of them might not be debt-free due to the shockingly high costs of post-secondary education. In this case they are likely to have a negative net worth throughout their 20s.
Looking at another example, most Canadians will never make more than $100,000 per year. Even if they do, it takes years of saving and investing discipline to grow your retirement savings. Many adults also have competing priorities associated with growing a family as well. That means they take on debt (hundreds of thousands of dollars of it) likely in the form of home ownership.
My advice to you is to never take any financial guideline too seriously. Don’t beat yourself up when you read this stuff. Simply make a mental note of it, kindly thank the financial guru for this information, and use it as one of your many inputs to chart your own successful financial path.
For the record, I’m certainly glad we didn’t use this retirement savings factor as our measuring stick. We wouldn’t be where we are today if we always followed what other people thought we should do in life.