Wealth are for those who:
- Take action rather than complain about an unfair system
- Max out their 401k and IRA every year
- Save an additional 20% or more after taxes and 401k/IRA contribution
- Take calculated risks through investments in various asset classes
- Build multiple streams of active and passive income
- Work on a side hustle before or after their day job
- Focus on the big picture and don’t nitpick with minutiae
- Want to achieve financial freedom sooner with their one and only life
Everybody should have a net-worth target to shoot for by age, work experience, and income. Targets will help you stick to your financial plan and motivate you to do more if you’re falling behind.
Too many people wake up 10 years later and wonder where all their money went. If only they could have a net-worth guide they could print out and stick on their refrigerator to keep them on track.
Below is my guide of net-worth targets to shoot for. The targets are based on a multiple of gross income, regardless of your savings rate. Obviously, the more you save, the more conservative the target net-worth multiples will be. But it’s always better to end up with too much money than too little, since there is no rewind button in life.
Net Worth Targets By Age, Years Worked, Income
Net Worth Targets By Age, Income, And Work Experience For Financial Freedom Seekers
In the beginning, it’s difficult to get started due to growing student loan debt, wage stagnation, and increased competition for good paying jobs due to globalization. Despite expectations of a large generational wealth transfer, inheritances usually won’t happen until much later in life. But after about 10 years in the workforce, you will start to build momentum, and achieving the net worth targets based on higher multiples will get easier.
If you so happened to have delayed entering the work force because you decided to go to graduate school or go travel the world like a lot of wealthier college graduates do nowadays, no problem! Simply follow the “Years Worked” column to find your appropriate multiple. For example, if you’re 30 years old with no work experience because you spent your 20s getting a PhD, your target net worth multiple is 0.
On the flip side, partly because of such large inheritance expectations, I expect Millennials and Gen Xers to see significant injections to their net worths after the age of 45. Another reason the target multiples of gross income after are higher as we age is because all of us become much more savvy with our money.
When we’re older, no longer can we cry ignorance for not knowing how to properly asset allocate our investments. Further, we become more knowledgeable about long-term investment trends, such as real estate crowdfunding, where one can finally take advantage of passively investing in lower valued properties with higher net rental yields without having to fly to the heartland of America, own physical property and deal with tenant headaches.
By our 40s, we’ve already gone through 20 years of money making wins and losses. Surely, by now we should all understand our monthly budgets, net worth compositions, spending tendencies, risk tolerance, and the importance of diligently tracking our money.
I get much more pushback on my net worth targets from folks in their 20s and 30s than folks in their 40s and beyond. The reason is because when we are young, we think we know what we don’t know. We are more arrogant, more stubborn, and less experienced. As we age, we see the positive effects of compounding that really starts to snowball with a larger financial nut. Accumulating the second million is much easier than the first.
Easier To Live On Less When Older
Being able to comfortably live on less is one of the biggest reasons why it’s easier to hit higher net worth target multiples as you age. The older you get, the desires of your youth slowly fade away because you’ve been there, done that. For example, when I was in my 20s, all I wanted to do was drive different types of luxury cars. After going through more than 10 different cars after college, all I want is one understated car that is reliable and safe.
Let’s say you have a $2 million net worth and make $200,000 a year at age 50. Your multiple is 10X, while I suggest it should be closer to 15X. If you can find a way to live comfortably off only $150,000 a year, or 25% less, then you’re spot on target at 15X. If you can live off $100,000, then you can retire immediately due to a 20X multiple. In other words, the more money you make and the more money you accumulate, the easier it is to adjust your spending downward.
For the first two years after leaving Corporate America, I was making around 70% less than I did while working. Funny enough, my after-tax savings rate still was around 50%. I just became super frugal by cutting out all extraneous expenses. I found joy in the things I already had.
Saving money is also easier when you don’t work because there are lots of free activities and discounts during working hours such as free museum week days, early bird dinner specials, the ability to enjoy free parks, libraries, hikes, etc. Your commuting costs go down and you no longer have to shop for work related clothes.
As a retiree, the biggest X factor are medical expenses and long term care costs. We currently pay $1,600 a month for a platinum health insurance plan for a family of three. Not cheap by any means, but affordable after a couple decades of aggressive saving.
Easy Net Worth Multiples To Remember
The major age milestones everybody thinks about are 25, 30, 40, 50, and 60. As a result, I’ve made it easy for everybody to remember what multiple of their average gross income for the past three years to shoot for.
Age 30: 2X your average gross income
Age 40: 10X your average gross income
Age 45: 15X your average gross income
Age 60 or whenever you want to leave your job: 20X your average gross income
When I left work in 2012 at the age of 34, my net worth equaled roughly 15X my average income over the last three years. In other words, I fell short of my 20X income target. However, thanks to a severance package that equaled roughly six years of living expenses, I was more confident to leave.
Since 2012, I have aggressively grown my net worth by building an online business and watching my investments grow with this bull market, while lowering the amount of income I need to be happy. One of the most pleasant surprises about early retirement is needing roughly 30% less that I thought was necessary. So many people forget that once they retire, they no longer need to save for retirement.
I’ve been well over the 20X income multiple for the past several years and I no longer fear running out of money or being forced to live a lower standard of living. Multiple income buffers such as passive income, online income, and the occassional consulting income ensure financial security.
If there’s one figure to remember from this post, it’s the 20X gross income multiple. At 20X, even if your net worth provided zero returns, it would still take 20 years to exhaust your wealth while maintaining your same standard of living.
You could of course invest your wealth in a risk free asset like a 12-month CD for a ~2.5% interest rate to extend the life of your principal. Or you could take slightly more risk and try and earn a higher return to increase your odds of your nest egg never running out. Just know that once you’ve achieved a net worth of 20X your gross income, your goal is to never lose money again.
The beauty about a 20X multiple is that you don’t have to wait until you’re over 60 to permanently leave work behind. If you can figure out a way to achieve 20X earlier, all the better!
Please track your net worth like a hawk so you know exactly where you stand and how much more you’ve got to go. There are too many middle-aged folks who wake up one day and wonder where all their money went because they didn’t stay on top of their money. When all they want to do is take it easy, they’re faced with the harsh reality that decades more work is their only option.