Life & Money

Stop Net Worth Comparison with Mainstream People

Trying to keep up with the Joneses? Asking, “How can I outdo him?” Find out why this is a bad idea for retirement savings. Stop Net Worth Comparison!

It’s a classic case of keeping up with the Joneses, or is it? What’s my neighbor doing? How can I outdo him? A comparison of net worth is a logical equivalent when comparing yourself to your peers at work, or perhaps other people your age. However, I argue that one-upping your cubicle neighbor is not enough. You’re going to have to do better than that.

If you made it as far as comparing your net worth to others, congratulations! You’re at least thinking about your financial future, and you’ve probably asked the question, “Why does my net worth matter?

Net Worth Comparison

Net worth comparison is a common benchmark retirement planners, and the respective software, provide. When I log into my workplace retirement center account, one of the predominately displayed links asks, “How do I compare.” I mean, it’s right in your face, hard to miss. There are the main menu options across the top (similar to this website), and then there are two tabs right below that. One of them is “Retirement Income”, the other “How do I compare?”

How Do I Compare Example

Is it really that important to people? The Retirement Income tab is important. That’s the center of their main service. But is seeing how you compare to your peers the second most important piece of information? Maybe I’ll waive it off as bad UX/UI design, as the webpage does go on to provide other helpful information.

*UX/UI is industry tech jargon for “User Experience/User Interface”. It refers to how a person interacts with your website and the overall experience that they have.

Why not compare to your peers?

Why do I seem to be so against doing a net worth comparison amongst your peers? Well, because…

Average isn’t good enough!

In this case, your going to have to outdo the Joneses, and I mean REALLY outdo them. The latest data (2016) from the Federal Reserve states that the mean net worth for Americans between the ages of 65 and 74 is $1,066,000, however, the median net worth is $224,000.

Wait a second…what’s the difference between mean and median?

Hold on…. a quick math lesson…

Purplemath gives a good, short explanation and provides a few examples. The mean, or average, is skewed because there are a few people that have a lot of money that are pulling the average up. For now, we’ll focus on only using the median because it gives a more accurate representation of the “normal” population by eliminating outliers (those that are extremely wealthy and those that are extremely poor).

Okay, so back to the numbers. Particularly, the median, $224,000, for people ages 65 to 74. If you follow the 4% rule for a safe withdrawal rate, that’s less than $9,000 a year to live on. That is simply not enough. I don’t care how frugal you are, that is not having dignity in retirement.

Remember, that IS net worth

It includes everything. Your house, cars, debts, etc. That income from your withdrawal rate off the net worth would mean living off of the government and/or receiving help from friends and family. Do you really want to move in with your kids or live in low-income housing in your golden years? Do you want to not be able to afford a car? I don’t think so.

Average income before retirement

For reference, let’s look at the average American’s income right before retirement age, from 55 to 65. The Bureau of Labor Statistics (BLS) provides all sorts of fun information and statistics on earnings (if you are a nerd like me). They provide median weekly earnings for people between 55 and 65, so that’s the number we’ll use. For the curious type, BLS offers options to break down the data further, but that is more resolution than we need.

Median Earnings per Week

The median weekly earnings, for Americans between age 55 and 65, as of the 2nd quarter of 2019, is $949. The median income has been steadily growing since coming out of the Great Recession. This last quarter is the second highest weekly earnings, only falling short to the 2nd quarter of 2018.

To find what that equates to annually, we will multiply $949 by 52 (weeks in a year) and get $49,348. Let’s go ahead and round that down to $49,000. That’s a lot more than $9,000.

What should my net worth be?

I see a lot of information from various retirement planners and places the general public would consider as an expert, such as, stating that, at age 60, your ideal net worth should be about 6 times your annual income. Investopedia actually gives a formula they obtained from the book The Millionaire Next Door.

The Formula

Net Worth Target = Age x Pretax Income ÷ 10

Going by that formula, at age 20, you should have 2x your annual income, age 30 you should have 3x, up to the number we’re using of 60, where you should have 6x. As an example, if you make $100,000, you should have a net worth of $600,000 by the time your 60.

If you’re getting caught up in net worth comparison, it may seem that you’re hitting it out of the park. This example person is making twice the median income before retiring and has about 2 and a half times more net worth than the median.

To me, that’s a good starting point, but still seems low. If I were to grade it, I probably would give it the average grade of a C, or maybe even a C-.

What would it take to get an A grade?

In my subjective grading scale, it would take a lot more to receive an excellent rating. Again, referring back to the BLS statistics, your peak earning years are 35-55, and then it begins to taper off. If you’re making $100,000 at age 60, let’s assume your average annual income for all your working years is around $70,000 (P.S. – I didn’t use any statistics to make up that 70k figure, just a little rough estimating). Let’s also assume you had a 40-year career.

The best of us aiming for FIRE can put away 70-80% of income into savings. I’d be willing to give an A with only a 60% savings rate. 60% of $70,000 is $42,000. Let’s cut our guy a little slack and assume he was getting certain life situations in order for the first ten years of his career, and was only able to save $42,000 a year for 30 years. Let’s put that into a simple compound interest calculator and see what we get.

High Savings Rate
High Savings Rate Compounded

Using a fairly conservative rate of 5%, you would have about $2.8 million. What if I assumed a more aggressive interest rate of 8%? That would result in $4.8 million. Yes, that gets an “A” grade, but Whoa! That’s a huge difference from the median of $244,000, and even the “ideal” $600,000.

Savings Rate for “Ideal” Net Worth

Now let’s use the same numbers with a 5% interest rate and figure out how much this guy would have to save annually to reach that $600,000 “ideal” net worth.

Average Savings Rate Compounded

With a little reverse engineering, adjusting the “Annual Addition” field until I reached a net worth of $600,000, I found that he would have to save about $9,031 a year. That equates to approximately 13% of his average annual salary of $70,000. Hey! That’s pretty close to the 15% that many retirement advisors recommend saving each year. Once again, you’re average.

My point: Stop Net Worth Comparison with the average person.

By the way, in 2014, the Center for Retirement Research at Boston College did the research on “How much should people save?” It’s a short 5 page read if you are eager for more numbers. Hopefully I’m not boring you with numbers already.

Wrap Up

In summary, net worth comparison doesn’t do you much good. If it motivates you to save more, then go for it, but you are going to have to do a lot better than the person next door. Chances are, they’re going to be nearly broke when it comes time to retire.

One great thing about the FIRE movement is that it is encouraging people to think about retirement and plan for their future, even if early retirement isn’t their goal. Retirement, in general, takes some planning, as you can see from looking at the numbers and stats discussed here, and many people do not think about it until it is late in the game.

If you need some help on how to calculate your current net worth, here are 2 Simple Components for Calculating Net Worth.

FIRE away!