Net Worth by 40: Are You on Track?
Is your net worth by age 40 putting you on track to retire? This is an important question we often get as fee only financial planners.
We know what our friends are doing--we see the kinds of cars they drive, the kind of houses they live in, and if they have boats or take expensive trips. We all have a guess at to how they're doing.
But are you on track to retire? What's the benchmark for your net worth by age 40. We talk about what it is and why it is.
In ACP, or the Alliance of Comprehensive Planners, we call this phase Early Accumulation. What a lot of people don't understand is that it takes a lot of patience.
In your 30s you can be buying a house, upgrading to a new house, considering taking different jobs, raising a family, and paying for daycare. Maybe your income is going up rapidly, or maybe someone died or you're going through a divorce.
It takes a lot of patience with saving while it doesn't seem to be paying off at this stage. You can feel stressed out, like you will never have enough to think about retirement, and anxious about the future. You can feel like you're not making progress.
We talk again about compounding and the rule of 72. This means that your money will double in ten years if invested to make 7.2% interest.10 time 7.2 is 72.
That means that your money will double several times. Our brains don't really pick up on this. They think linearly. So, eventually if you stay patient and keep investing, you should get to a hockey-stick type growth.
The way to use our net worth at 40 guideline is to figure out if you're ahead or behind. Can you look forward to more flexibility, or do you have some catching up to do?
00:00 Welcome 01:05 The number 1 Question
02:35 What this stage requires
06:38 Overall well balanced net worth
08:07 Another thing in your 30s
Here's Bridget's firm website: https://www.sullivanmermel.com
John's firm website: https://www.trinfin.com
For advisors around the US: https://www.acplanners.org/home
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Bridget: How much money should you have at age 40? That's what we're going to talk about today on Friends Talk Financial Planning. Hi, I'm Bridget Sullivan Mermel. And I have a fee-only financial planning practice in Chicago, Illinois.
John: And I'm John Scherer. I have a fee-only financial planning practice in Middleton, Wisconsin. And before we start talking about how much money you should have by the time you're 40, I want to remind people to subscribe. Please hit that subscribe button. That helps other people find this information and helps promote our channel. And let's jump right in. I'm excited to talk. We've talked in the past about when you're first starting out. By the time you get to age 30, what should you have? One times your net worth; one times your income.
As you get into your 30s—you’re approaching 40—what then? We talked about last time how you see your friends, your neighbors, what kind of cars they drive, how they do, and think, “Am I doing the right things?” That's one of the things I think is so valuable about this conversation. Nobody talks about, “How do I know if I'm on the right track?” Bridget, what do you tell people when you talk with them about the question of am I on track? I'm approaching 40. What do I need to do to be on track?
Bridget: Well, first of all, I wanted to say that that's probably the number one question I get from people: “Am I on track? How am I doing? Am I okay?” So, if you have that question, it's a great question. What I tell people is that by the time you're 40, you should have probably three times your annual income in your net worth. And remember, your net worth includes everything. It includes your savings accounts. It includes your 401K. It includes any investment accounts you might have, and it includes equity in your house and equity and rental property if you've accumulated that stuff by the time you're 40.
So, one to three times is the amount. Now, to some people that might sound kind of low, but this is kind of a complicated time in people's lives financially, because you have a whole bunch of things that you're really trying to establish. Usually you're trying to either buy a house or a condo or upgrade. Oftentimes people are having kids at this point, or they want to move because of the kids, so they put more money into real estate than they would otherwise.
Often in this time in life, your income might be going up rapidly, or one person might stop working. So then maybe your household income is going down, or maybe people are separating or getting divorced. So, there's a lot of changes that are going on, and it can take more patience in this phase for the numbers to start creeping up than it does in some of the other phases.
John: That’s such a great point. There's so much change going on. And we know what happens; we know the math. The more that you add to your net worth the more your money starts making more money. And we know, okay, we've seen that compound interest is so powerful. The problem with it is that you just don't really see it. You're saving, you're saving, you're saving, you're saving, and, golly, it's not going anywhere. And then all of a sudden, it's like this hockey stick graph, it just starts to take off.
And so, if you're in your 30s, you're in that stage of life where you sometimes like losing weight or doing other things. If you exercise and exercise, but, golly, you don't see anything. All of a sudden, however, it just takes off. So that's where that patience comes in. I love that idea on things.
Bridget: Yeah. Well, we did a video on the Rule of 72, which is one of your great ideas. And I was talking to another client about this. Now we're going to review this really quickly. Tell me if I'm wrong. If you get 7.2% return for ten years, your money doubles.
John: Right. It's the interest rate that you're earning times the number of years equals 72 to double. Right. So if you earn 7.2% each year on your investment times ten gets you to 72, so then your money doubles every ten years.
Bridget: And so, nine times eight would be 72.
John: So if you get 9%, your money doubles every eight years.
Bridget: Okay. So the reason I say this is because if you look at your money, say when you're 30, whatever you arrive to this decade should kind of double.
John: Just what's already gone in there, right?
Bridget: Yeah, right. And so that's one of the things that people don't appreciate. If you actually look at how much money you have now. And if you've got it invested properly, it should be doubling over time. And then you look at what does that doubling mean? Okay, I have $200,000 now, then it's going to be $400,000, but then it’s not going to be $600,000, it’s going to be $800,000. That’s when we start getting into that hockey stick effect. For me personally, before I was a financial planner, thinking about it that way kind of helped me. It helped me wait out this long period of thinking, “Okay, I'm putting a lot in, and I don't seem to be getting a lot out.”
John: I know the math. We know it, but it just doesn't seem real all the time. It's going to be $800,000 then it's going to be 1.6 million. And then you see it and you go, “Oh, that's what happens.” And so, part of our mission with this recording is just to say, “Yeah, if you're in that spot, you’re doing the right thing.” This does happen. It just seems so artificial.
Bridget: And it takes a long time. At least, it seems to take a long time when you're doing it. And I see people suffering from anxiety, uncertainty and overall feeling of sickness during this time about their money because they just don't feel like they're getting anywhere. But they are.
John: You just don't see it.
Bridget: And then what happens is there's some magical day, and it could be ten years later when the trumpets blare, and you think, “Oh, now I'm okay.” And what I try to help people see is that they're actually okay when they're 38…
John: Even though it doesn’t feel like it.
Bridget: …and they’ve set themselves up to double when they're 56 or 58. They're actually okay; this is going to work. So it's an interesting phenomenon. Again, this depends on a well-balanced overall net worth. If you have all your money in savings accounts, it's going to be difficult.
John: It's not going to double every ten years. It's going to take a long time. The other thing I wanted to point out about this is that these are guidelines. And so listen, if you're in your 30s somewhere, we want to see you on the early end, have one times your annual income and net worth and then grow to three times. Well, if you're a little bit behind, it's not like, “Oh, my gosh, this is the end of the world.” No. You're going to have some catching up to do.
You can kind of identify, “Oh, yeah, I'm 38. I'm going to have to do some catching up or work longer or some of those things.” And on the other side, “Geez, I'm at five times.” Oh, good, you're ahead of the game. You're going to have some more flexibility down the road. Right. These aren't hard and fast rules, or standards of right and wrong. It's more of, “Oh, jeez, I'm kind of ahead. I can relax.” Or “I'm kind of behind. I need to focus a little bit more.” This guideline gives you that perspective on just how to think about things.
Bridget: And it can help you with decision making. For instance, I want to take this job that pays more or less. Or my spouse or partner wants to start a new business or quit paid work and raise a family—all those things. It can help you make those decisions. And again, if you're ahead of the game, it can hopefully free you up to feel like you can have that flexibility because you've been doing a good job saving all along.
John: Yeah, that's great. And one other thing I'll just point out is, as you mentioned before, in your 30s oftentimes, that's the most expensive time of life. You may still have student loans, marriages, houses, divorces, kids, preschool, daycare. No wonder people are stressed out. And so, this gives you some framework. And maybe that's a great place to circle up on.
When you're in your 30s, we would like to see net worth starting around one times your annual income and growing to three times. That's a good guideline to see if you're on track or maybe you need to focus a little more or you can back off a little bit. If you can use that as a benchmark, then you don't need to worry about it. It's not about what kind of car you're driving—those sort of things—that gives you some sense of security on that.
Bridget: With that, let me mention that the thinking that we are just describing right now really comes from Bert Whitehead and the ACP or the Alliance of Comprehensive Planners, which is a group of fee-only planners that is a not-for-profit group. There’re planners all over the country. If you like the way that we're approaching things and the way that we're talking about this and you're looking for another planner or more information, you can check out acplaners.org.
John: That's right. And don't forget to hit that subscribe button. And with that until next time.
At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.