Danko and Stanley, authors of The Millionaire Next Door, have proposed a simple formula to calculate a reasonable value for net worth at a particular age with a given income. This formula produces bizarre results for people in their twenties. However for ages over forty, the results are pretty realistic when compared with actual averages.
Net worth = Age X Pretax Income ÷ 10
Hence:
A couple about 50 years old earning a combined family income of $65,000 a year should have a net worth in the neighborhood of $325,000. If they have been paying on a mortgage for over 20 years and have been contributing to their 401K, this is fairly reasonable as an average number.
If you are near this target, you are considered by the authors as an average accumulator of wealth.
If your net worth is less than half your target, you are viewed as an under-accumulator of wealth.
If you have more than double this target, you are considered a prodigious accumulator of wealth and I tip my hat to you, sir.
The Millionaire Next Door is on my short list of financial "must read" books.
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