# Age normalized net worth ratio



## Underworld (Aug 26, 2009)

When receiving financial advice, I would be more likely to trust the advice of a high net worth individual than a low net worth individual. Because they can walk the walk.
It would be great if there was a way to measure net worth relative to age. Due to compounding returns, net worth can take an exponential curve.









My math is pretty bad - but what about the above equation to calculate your net worth relative to your age? Let me know whether its completely wrong 

For me its sqrt(250000)/34 = *14.7*

Some one with a million dollar net worth at the age of 34 has a score of 29.4.

Just a bit of fun - Thoughts?


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## brad (May 22, 2009)

This gives no indication of how they arrived at their high net worth, though.

I used to live next door to a woman whose great-aunt invented Jello. My neighbour inherited a chunk of that fortune and was a multi-millionaire at age 18. Would I trust her financial advice? Not necessarily: she had someone managing her finances and wasn't very involved.

A low net worth individual who has studied evidence-based investing and taken time to learn how investing works would be more interesting to me as a source of advice than a high net-worth individual whose riches were won by three lucky years on the stock market.


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## bgc_fan (Apr 5, 2009)

Or you can use the Millionaire Next Door PAW/UAW calculation, which takes in consideration your total annual income:

Age *10% * Annual income = Average accumulator of Wealth

If you are above that, you are a PAW - Prodigious Accumulators of Wealth, below, you are a UAW - Under Accumulator of Wealth.

It gives a more reasonable comparison when you have someone making $20K, vs $100K.


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## Underworld (Aug 26, 2009)

Thats an interesting formula the PAW/UAW I haven't seen that - thanks! I guess its a completely different measure that doesn't take into effect larger sums of money in later life earning a greater return.


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## james4beach (Nov 15, 2012)

Underworld said:


> Due to compounding returns, net worth can take an exponential curve. . . . My math is pretty bad - but what about the above equation to calculate your net worth relative to your age? Let me know whether its completely wrong


That's not a bad idea and I agree with the premise that net worth grows exponentially and it would be useful to have something relative to age like what you mention. It might be good to build a table to check this, here using a rough assumption of 5% wealth growth per year. That's a middle of the road between ideal best case market returns, and a reflection that life gets more expensive with time 

age ... NW
30 ... 100
40 ... 163
50 ... 265
60 ... 432

I think the goal would be to come up with a score equation that normalizes this and gives an approximately constant result, showing that a 30 year old with 100K has about the same net worth as a 60 year old with 432 K. A precise equation that flattens that table to give a constant number would be: NW/(1.05^AGE) but obviously that's based on the 5% NW growth assumption.

Your equation seems to approximate this too! When I plug your equation into my table, I get these results

age ... sqrt(NW)/age
30 ... 10.5
40 ... 10.1
50 ... 10.3
60 ... 11.0

Using your equation my score is *17.1*


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## james4beach (Nov 15, 2012)

brad said:


> This gives no indication of how they arrived at their high net worth, though.


It may not matter though. It depends on what the goal of the comparison is. Are we trying to figure out someone's standing with respect to a comfortable retirement?

What is the goal?


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## bgc_fan (Apr 5, 2009)

Underworld said:


> Thats an interesting formula the PAW/UAW I haven't seen that - thanks! I guess its a completely different measure that doesn't take into effect larger sums of money in later life earning a greater return.


It isn't perfect, mainly because people don't make the same amount of money every year (so one or two outliers may skew the result); however, it is a decent measure to see how well you accumulate wealth compared to those who have the same amount of income.

Obviously, once you retire, it doesn't make any real sense (assuming you have minimal income), but you are starting to draw down on savings at that point anyway.


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## Underworld (Aug 26, 2009)

17.1! Dominating!


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## brad (May 22, 2009)

james4beach said:


> It may not matter though. It depends on what the goal of the comparison is. Are we trying to figure out someone's standing with respect to a comfortable retirement?
> 
> What is the goal?


I assumed the goal related to the original poster's statement at the very top of the thread:

"When receiving financial advice, I would be more likely to trust the advice of a high net worth individual than a low net worth individual. Because they can walk the walk."

I was just pointing out that high net worth individuals could have arrived at their high net worth any number of ways.


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## Barwelle (Feb 23, 2011)

My issue with the millionaire-next-door calculation is that it only takes into account the most recent 12 months. IMO, using an average of the last 5 years or something would be more telling. 

OP's equation has its issues too as has been pointed out... but just for fun... excluding vehicles, and figuring current market value of some real estate... I'm at 18.2  (I'm obligated to give credit to my parents ... I'm still living at home rent-free ...)


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## Video_Frank (Aug 2, 2013)

21.9


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## heyjude (May 16, 2009)

34, FWIW


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## james4beach (Nov 15, 2012)

My word, these are some high numbers! I also like that this metric hides the real dollar amount so it's providing some privacy and still letting us compare.

34 ? Gosh! I'm going to imagine that heyjude is a 93 year old with $10 million 

heyjude: any tips on how I can become as wealthy as you?


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## heyjude (May 16, 2009)

james4beach said:


> My word, these are some high numbers! I also like that this metric hides the real dollar amount so it's providing some privacy and still letting us compare.
> 
> 34 ? Gosh! I'm going to imagine that heyjude is a 93 year old with $10 million
> 
> heyjude: any tips on how I can become as wealthy as you?


:biggrin: Just keep doing what you're doing, James. Work hard, LBYM, and inherit a few bucks.


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## birdman (Feb 12, 2013)

34 as well but thats only because I'm old! I guess I have to share it with my wife so I guess thats 17 ???


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## nobleea (Oct 11, 2013)

frase said:


> 34 as well but thats only because I'm old! I guess I have to share it with my wife so I guess thats 17 ???


Not clear how you would include a spouse in this. Do you split your networth so it's based per person? (you'd have to do it before the square root).
Even then, what if the wife is the financially savy one doing all the investments. Would you put a lot of weight in her husband's financial opinions since his number is high even if he knows nothing about finances and investments?

I'm 24 if it's just based on me, but if we split the networth, I'm at 17 and my wife is at 19 (she's younger).


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## steve41 (Apr 18, 2009)

I prefer the "95/4/2 net income" metric.... What level of after tax income can you enjoy such that you (just) die broke at age 95, assuming a 4% ROR and 2% inflation?


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## cutchemist42 (Oct 15, 2012)

So when you do that (age*10%*pre-tax Income) are you factoring in the worth of a pension plan or CPP?


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## My Own Advisor (Sep 24, 2012)

Like heyjude I have to share with my wife 

30 for us then.


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## lonewolf (Jun 12, 2012)

Underworld said:


> When receiving financial advice, I would be more likely to trust the advice of a high net worth individual than a low net worth individual. Because they can walk the walk..
> View attachment 8881


 Be carefull on that one. There are people out there that have good track records forecasting the markets by independent rating services. Put emotion into the game with their own money on the table & their system can make money while they lose money on the table they cant follow their system.


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## heyjude (May 16, 2009)

My Own Advisor said:


> Like heyjude I have to share with my wife
> 
> 30 for us then.


Heyjude does not have a wife. It's mine, all mine. :biggrin:


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## My Own Advisor (Sep 24, 2012)

I stand corrected. You're rollin'...... 😀


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