A consideration of net worth by life stage

Giving yourself net worth goals throughout life may help ensure your finances are on track for retirement and other life objectives. Here are some average net worth targets by age, as well as tips on creating a financial plan based on turning your goals into reality. 

What should my net worth be?

Setting net worth targets is obviously unique to each person and their circumstances. However, as a general exercise, creating a personal finance goal for your net worth can be a helpful way to analyze whether you’re on track for retirement. As you build wealth, consider all your assets to help you make financial decisions, like whether to buy a second home or how to pay for your kid’s college tuition.

You can use two basic formulas—salary multiples and annual spending multiples—to set a target net worth for different life stages and see if your current net worth is on track. Doing so gives you an idea of how prepared you might be for retirement, along with other financial goals.

1. Salary multiples

   One method for targeting net worth by age is using salary multiples to create an average net worth goal for each decade. This process is primarily geared toward retirement planning rather than holistic life goals. Additionally, you can choose whether to include only your retirement accounts or add in other assets like your home equity.

   For each decade, your target net worth should be a specific multiple of your salary for that year or timeframe. As you age and earn more, that multiple grows. This is possible if you continue saving the same percentage of income as your salary increases; plus, you should benefit from long-term compound growth on your investments.

   Using this method, what’s your target net worth at each stage?

   By the end of your 20s, your net worth goal would be just 0.5x to 1x your salary. So, if you averaged a $60,000 salary, your personal net worth goal by age 30 would be between $30,000 and $60,000.

   Throughout your 30s, your total net worth goal should be around 2x your average salary over that specific decade.

   By the time you hit 40, your net worth target will be 2x to 3x your current annual salary. In your mid-40s, that number grows to 3x to 3.5x. This allows you to have a positive net worth that supports growing your savings for retirement.

   At age 50, your target net worth should be 4x to 5x your average salary. If you earn $400,000 annually at this point, then your net worth should be $1.6 million to $2 million.

   By age 60, bump your target net worth to 6x to 8x your salary. By your target retirement age, your net worth goal would be 10x your ending salary. If you finish your career earning $750,000 a year, your net worth goal for retirement would be $7.5 million. Again, this is only a rule of thumb, as everyone’s circumstances differ.

2. Annual spending multiples

   Another method for estimating target net worth at different ages is using spending multiples. As you get older and earn more, you’ll likely spend more as well. This method can be a good guide for ensuring your net worth keeps up with “lifestyle inflation.”

   Let’s start by fast-forwarding to the end target. By retirement age, the goal is a net worth of 16x to 20x your annual spending. With that in mind, you can set spending multiplier goals for each decade, such as:

   • 1x spending by age 30
   • 2x spending by age 35
   • 4x spending by age 40
   • 8x spending by age 50
   • 12x spending by age 60
   • 28x spending by age 67

   Remember, you’re not necessarily actively saving that amount each year. This is about how much your total net worth should reach to keep pace with the same level of spending in retirement. There are many variables this method doesn’t account for, like paying off your mortgage by retirement or spending less because your grown children are out of the house.

What to include in your net worth calculation

Calculating net worth is fairly simple. Note that net worth estimates often focus heavily on retirement accounts. However, you may have a diverse range of assets that increase your net worth. Let’s consider four asset types.

1. Investments

   All investments count toward your net worth, not just your retirement accounts. Be sure to add every account and fund you own, even if they’re not tax-advantaged. Also include any restricted stock or stock options that are part of your executive compensation package.

2. Tangible assets

   Tangible assets, including real estate and personal property, also add to your net worth. Real estate includes your primary residence, vacation or rental homes and land or commercial property holdings. Just remember to include any mortgages as a liability before calculating your final net worth.

   Personal property includes vehicles, boats, artwork, jewelry and other items with measurable value. They might not be liquid, but they still count toward your net worth.

3. Intangible assets

   Intangible assets include things like intellectual property, patents or trademarks. A professional appraisal or valuation can help establish their true value.

4. Business value

   As a business owner, you may include the value of your business as part of your net worth, especially if a sale or acquisition is part of your exit strategy. Like intangible assets, a professional valuation is the best way to determine your company’s market value. A valuation may also be useful because the process often reveals opportunities to make your business more attractive to prospective buyers. By doing this well before your target retirement, you have time to implement any professional recommendations.

Factors impacting your net worth goals

At CI Private Wealth, we take a holistic approach to managing your wealth. While using pre-set formulas to create net worth targets is a generic starting point, it doesn’t take into account the nuances and stress-testing of a comprehensive financial plan. That’s why we recommend working with your wealth advisor to consider all the variables involved in preparing for retirement.

Here are two variables we consider when helping clients create their long-term wealth goals.

1. Retirement age

   Some people are happy to work until they’re in their mid-to-late 60s, while others hope for an early retirement. Whatever your goal may be, it’ll influence your target net worth and the cash in your savings account. The longer you wait, the more time your investments have to grow. Plus, a higher net worth may give you more financial freedom. 

   Your wealth advisor can help you estimate a target retirement age. Then, as you get closer to making that decision, your team will run multiple scenarios to see what your financial situation looks like at different retirement ages.

2. Retirement lifestyle

   Not all retirements are the same. Do you plan on maintaining a large home so extended family can visit? Do you anticipate reducing some of your living expenses by downsizing? How much will you travel? Your wealth advisor can lead you through a series of questions to help create a retirement plan that starts with your vision, then a wealth strategy for making it come true.

The bottom line

The ideal net worth for your age depends on a variety of factors. No single formula works for every person. That’s why it’s important to have a strong financial planning team helping you make the best financial decisions.

Your CI Private Wealth team collaborates with you to create a financial plan to help you move toward achieving your long-term goals, whatever they may be.

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