Summary
Here is my Net Worth Estimates depending on age and salary values. Please read the notes all the way so you know what the assumptions are for the estimates.
Notes
There are not many sources sources that provide an estimate of what should be a good net worth for every American based on a specific age group or income level. CNN Money has a net worth calculator, but it is very opaque and does not explain the assumptions well. The reasons why this is so are many. We are all different. Some are single. Some are married. Some go to graduate school and accumulate loans. Some start businesses and file for bankruptcy while others become the facebooks and googles. It’s just that difficult to come up with net worth values for everyone. The range of values is just so wide!
A friend of mine who used to work for an insurance company came up with an estimate before and it was brilliant. He focused on a sample. His calculations were based on good assumptions, and you can calibrate them a little to suit your situation. If I am not mistaken, his numbers are based on a sample or cohort that tends to marry a little later in life, and are therefore not exposed to the additional expenses incurred when one already has a family (this is my sample).
But before we delve into this analysis, what is Net Worth? Net worth, in general terms, is the value of your assets minus liabilities.
See the example below:
I hope the chart above is simple enough to understand. This is fundamental to understand as this will provide a context to what I will be doing next.
Analogy
Now, every parent knows about the boy/girl height and weight chart benchmark. This tool provides a benchmark to measure your children’s weight and height and compare these numbers against those of the general children population. It is also divided into percentiles (10th, 20th, 30th, and all the way to 95th). The independent variable is age. For example, my son is 5.5 years old and he is 107 centimeters tall. Comparing his height to the boy height chart, he is in the 13th to 15th percentile.
Now, what if we have this benchmark for net worth? Wouldn’t it be so helpful? Yes. As long as your situation closely resembles the assumptions used in the benchmark. Having said this, I have come up with the numbers and values for my sample.
Critical Information
My sample population assumes the following:
- Starts working full time at age 24, two years later than the normal age of 22.
- Marries early (22 to 27). While this may appear a paradox – why discuss wealth if you are going to get married early anyway, start spending more money, and save less – there are those that believe there are non-financial rewards achieved by starting a family early.
- Only one person works full time (sole income earner) and the mother is a stay-at-home mom.
- Live by the principle that you don’t spend more than what you make or “live within your means.”
- Graduates from college without any student debt. There are ways one can graduate without any loan. The author graduated without any financial help from parents. He applied for and was granted scholarships, worked part – time, and did side businesses. Still, I still put a case for one with debt.
Net Worth Summary
I have broken and described net worth categories down by 1st, 2nd, 3rd, and 4th Quartiles.
First Quartile Details
In this scenario, we have the following:
- College graduate and starts working at 24 (instead of 22) with a starting pay of $40k. Majors in an oversupplied field.
- Works hard, skilled, gets a steady pay increase of 2% annually, but is promoted late and seldom. Note that promotion does not necessarily mean a higher managerial status, but more of getting an incremental increase in one form or another. Promotion increase is 5%.
- Contributes to his retirement account the max rate of 6% (401k) and his employer matches 100% of that 6%.
- Only saves 10% of his after tax income (this is very low)
- Investment return average of 4% annually.
- After all the deductions and exemptions, is on average in the 20% tax bracket (clearly depends on the stage/age and income, average tax varies, but for the sake of argument, we will put it at 20%).
With the exception of age and promotion, all values are in US$ thousands
As you can see, this person does invest his saved cash in his first investment (whether a home or something else) at the age 40 and subsequently all other investments happen when he accumulates cash and after a little more experience in life. He or she leaves a little cash for emergency purposes. The main point here for the first quartile is that even though this person does not fully engage himself to investing, as long as he saves a small percentage of what he earns, in his life time, he will reach the millionaire status, albeit at a really late age of 65ish.
It takes a LONG time to accumulate wealth if you are in this category and how much more if you started off with a loan balance!
Now, how much more when you start off with a debt burden. The debt assumption here includes student and some credit card loans. The loan rate is about 4%. Noticeably, positive net worth does not happen until the age of 29.
Second Quartile Details
In this scenario, we have the following:
- College graduate and starts working at 24 (instead of 22) with a starting pay of $50k. Majors in business or other fields that receives an above average starting salary.
- Works hard, skilled, gets a steady pay increase of 2% annually, and is promoted more often. Note that promotion does not necessarily mean a higher managerial status, but more of getting an increase in one form or another (bonus, others). Promotion increase is 5%.
- Contributes to his retirement account the max rate of 6% (401k) and his employer matches 100% of that 6%.
- Investment return average of 4% annually.
- Saves 20% of his after tax income
- After all the deductions and exemptions, is on average in the 20% tax bracket (clearly depends on the stage/age and income, average tax varies, but for the sake of argument, we will put it at 20%).
With the exception of age and promotion, all values are in US$ thousands
Note and conclusion: The person here invest his saved cash at the age 28 and subsequently all other investments happen when he accumulates cash. He or she leaves a little cash for emergency purposes. The main point here for the average net worth is that this person starts investing early and he engages him/herself into these investments and reaches the millionaire status between 50 and 55 years old.
At the end of his/her career, he/she will have accumulated roughly $2 million. The sooner you invest, the more likely your investment will grow due to compounding interest. I know many prudent people in some blue chip companies get to this nest egg when they retire.
Third Quartile Details
In this scenario, we have the following:
- College graduate and starts working at 24 (instead of 22) with a starting pay of $60k. He majors in Chemical Engineering or any other relatively higher paying jobs. Stressful, but well compensated.
- Works hard, skilled, gets a higher pay increase of 4% annually, and is promoted more often. Note that promotion does not necessarily mean a higher managerial status, but more of getting an incremental increase in one form or another.
- Contributes to his retirement account the max rate of 6% (401k) and his employer matches 100% of that 6%.
- Investment return average of 4% annually.
- Saves 25% of his after tax income
- After all the deductions and exemptions, is on average in the 20% tax bracket (clearly depends on the stage/age and income, average tax varies, but for the sake of argument, we will put it at 20%).
With the exception of age and promotion, all values are in US$ thousands
Note and conclusion: The person invests his saved cash at the age 28 and subsequently all other investments happen when he accumulates cash. He or she leaves a little cash for emergency purposes. The main point here for the third quartile is that this person starts investing early, puts focus on increasing his value, makes calculated risks, and is focused.
This person reaches the millionaire status between 40 and 45 years old. At the end of his career, he will have accumulated roughly $4 million. My friend who started as a chemical engineer at one of the largest Oil & Gas firms in the US and stayed with the company for 30 years told me he hit his first million when he was 45 years old. He eventually became the Reserves Manager for the company. He was not a savvy finance guy but he was prudent with his money. He was the sole breadwinner and had 3 kids.
When he retired he had a net worth of $4 million.
Fourth Quartile Details
In this scenario, we have the following:
- College graduate and starts working at 24 (instead of 22) with a starting pay of $70k. He majors in Investment Banking, Computer Science, or Petroleum Engineering or any other high paying jobs. Stressful, but well compensated. The salary increase in these types of jobs are usually higher.
- Works hard, skilled, gets a higher pay increase of 4% annually, and is promoted more often. Note that promotion does not necessarily mean a higher managerial status, but more of getting an incremental increase in one form or another.
- Contributes to his retirement account the max rate of 6% (401k) and his employer matches 100% of that 6%.
- Investment return average of 4% annually.
- Saves 25% of his after tax income
- After all the deductions and exemptions, is on average in the 20% tax bracket (clearly depends on the stage/age and income, average tax varies, but for the sake of argument, we will put it at 20%).
With the exception of age and promotion, all values are in US$ thousands
Note and conclusion: The person invests his saved cash at the age 28 and subsequently all other investments happen when he accumulates cash. He or she leaves a little cash for emergency purposes. The main point here for the third quartile is that this person starts investing early, puts focus on increasing his value, makes calculated risks, and is focused.
This person reaches the millionaire status between 40 and 45 years old. At the end of his career, he will have accumulated roughly $5 million. Although I would not limit the professions to investment bankers, management consultants, computer programmers, and high end lawyers, these are usually the professions that are typically paid high starting salaries (and even after). If they are prudent with their money, they often achieve, if not, exceed this net worth.
Appendix
The categories on the table are the following:
- Age – age when the person started working professionally
- Promotion – this is when they get any promotion or increase in pay
- Salary – self explanatory, $ pay
- Tax – Effective Tax Rate
- 401k (Emp) – this is the portion the employee avails as a % of Salary
- 401k (Comp) – this is the portion the company avails which matches the contribution of the employee. If the employee avails 6%, then the company will match that 100% at 6% of the salary.
- After Tax – Salary, minus 401k and tax
- Expenses – this includes rent, utility payments, food, essentially, the cost to live.
- Savings – this is what is left after tax, 401k
- Loan Bal – loan balance (i.e. student, credit card, etc.)
- Repayment – loan repayment
- Ending – loan balance minus any repayment
- Investment – this is related to any investment the person invests in (initial down payment on a home, stocks, bonds, others).
- Cash Savings – savings minus any loans
- Cum. Cash Savings – this is the cumulative cash savings accrued over the years. This assumes no interest returns. Currently, savings returns have been close to zero.
- Cum 401k – this is the cumulative 401k savings. The investment return assumed throughout the model is very low and much lower than the average over many decades.
- Cum Investment Balance – This is the cumulative investment balance over the years and gives a low digit return.
- Net Worth – this is Cum Cash Savings + Cum 401k + Cum Investment Balance.
Some may question if you have a mortgage, would this count as debt? The assumption here is that the value of the home is equal to or greater than the loan amount and the equity invested by the person is the only one that counts in the Net Worth calculation.