Stanley and Danko, in their classic The Millionaire Next Door, discussed a rule of thumb to determine if you were an average accumulator of wealth, an under-accumulator of wealth, or a prodigious accumulator of wealth.

** The Millionaire Next Door Net Worth Formula**

Expected Net Worth = Age X 0.1 X Gross Income

A prodigious accumulator of wealth (PAW) has a net worth over 2 times as large as the expected net worth (ENW), and an underaccumulator of wealth (UAW) has a net worth of less than half of the ENW.

It's only a rule of thumb, so you can't expect too much from it. (In fact, they revised it in The Millionaire Mind to ENW = Age X 0.112 X Gross Income). This formula has been criticized as being particularly inaccurate for young people early in their career. It is completely useless to a typical physician. For example, despite saving over 20% of my income and having no significant non-mortgage debt since getting out of medical school 8 years ago I've barely got more than half of my apparent expected net worth.

**Doctor Net Worth Calculation**

I think it might be useful to doctors to have a good rule of thumb designed just for them. You could make a complicated formula using average indebtedness coming out of school and age and prior careers and inheritances etc, but part of the benefit of a rule of thumb is that it is simple and easy to use. Here's what I suggest:

Expected Net Worth of a Doctor (ENWD) = Average Post-Residency Income X Years Since Training X 0.25

Using this formula, a family doctor averaging $150,000 a year for 10 years since leaving residency should have a net worth of $188,000-$750,000. An orthopedist averaging $500,000 for 5 years since leaving residency should have a net worth of $313,000-$1.25 Million. Using this formula, I actually qualify as a PAW (which seems reasonable to me). Run your numbers and see how you stack up. Can you think of a better (simple) rule of thumb for doctors?

Some of you called me out on the fact that my physician net worth rule wasn't based on any actual data, just what I thought docs ought to have.

Well, there's not much data out there. I did manage to find one survey from Medical Economics based on 2004 data that was interesting however. It included 2 interesting figures which I will reproduce below:

Well that's interesting, but really not that helpful, since it includes everyone from the brand spanking new attending with a negative net worth to the 75 year old that has been retired for a decade already. This next one, however, is much more enlightening.

Much more interesting here. There are several things I find interesting about this chart. First, even among physicians, the value of their home is still a major part of their net worth. In my experience, the wealthier you are the less of a difference the value of your home should make. That's because in many ways a home is generally more of a liability than an asset. I also find it strange that the survey would ask about “retirement plan” separately from “stocks” and “bonds.” I wonder if that confused any of the respondents. It seems to me that most investors, including physicians, would own most of their stocks and bonds WITHIN a retirement plan.

I'm also surprised there's no category for debt. Some of it just doesn't make any sense either. Look at the under 35 category. $64K outside of retirement plans but only $13K inside retirement plans? There's something not right there. At any rate, let's adjust the data for inflation and see what it looks like. From 2004 to 2011, inflation has been a total of 20%. Let's increase the values accordingly.

Age | Net Worth |

<35 | $144,000 |

35-39 | $480,000 |

40-49 | $840,000 |

50-59 | $1,440,000 |

60+ | $1,952,400 |

**Average Doctor Net Worth**

I wonder how my formula stacks up using ACTUAL physician net worth data. The average physician salary in 2004 was $200,000. Of course, my formula uses the physician's average salary since residency, so just using his current salary will likely overestimate his expected net worth by a certain amount. But assuming the doc got out of training at age 30, let's see how well my formula predicts his expected net worth.

First, for the under 35 category, we'll use a doctor averaging $200K who is 3 years out of residency.

$200K * 3 * 0.25 = $150K A little high, but so far so good.

Now, for the 35-39 category.

$200K * 7 * 0.25 = $350K, a little low for the actual data, but the actual data is certainly within the range of $175K-$700K that I've used for the expected net worth of a doctor.

The 40-49 category gives us this data:

$200K * 15 * 0.25 = $750K. Again, essentially right on target.

50-59 category:

$200K * 25 * 0.25 = $1.25 Million. Right on.

Over 60 category:

Let's use a doctor 35 years out of residency, so,

$200K * 35 * 0.25 = $1.75M Right on target. Of course, as we get further out from residency, the effect of using this year's salary instead of the average salary becomes larger. But it looks to me that the data fits pretty well just using this year's salary, so let's just use that in my formula from now on. Huge salary increases tend to be relatively rare for established attendings anyway.

Looks to me like my Physician Net Worth Formula fits the only available data on physician net worth mighty well.

Expected Net Worth of Doctor = Salary X Years since Training X 0.25

If you have less than 50% of your ENW, you are an underaccumulator of wealth. If you have more than 200% of your ENW, you are a prodigious accumulator of wealth.

Just by way of comparison, here's a chart showing the net worth of the average American. Docs, as you might imagine, are still doing pretty good relatively.

I like this analysis. I have been quite skeptical of Stanley’s formula when it came to physicians.

In “Stop Acting Rich: And Start Acting Like a Real Millionaire”, Stanley also excluded house equity which he considered “augmented” or “embellished net worth”, which I thought made sense. He made the point that many people tend to overestimate their assets and underestimate their liabilities. So, in this book he defines millionaires based on reasonably liquid assests such as stocks and bonds and not house wealth.

Any formula based solely on current income, ignoring income history, cannot be right. The only way to find a good formula is to review data on networth of people with knowledge of their age and income history. Without that, it is just make believe.

I doubt that data has been ever collected, but you make a good point. It would be an interesting study. Do you know of any database that collects physician net worth data?

These, summary stats though:

http://www.medscape.com/features/slideshow/compensation/2015/debt-and-net-worth

http://www.medscape.com/features/slideshow/compensation/2016/public/debt-and-net-worth#page=3

old thread but i wonder if people would comment.

if you use mortgage debt in this calculation it seems like you need to be very aggressive saver and payer-off of debt to get there.

I’m EM 5 years out let’s say $265k so my figure is $331k. that’s sure as hell what i have in my retirement and cash accounts but the moment i buy a house at 1.25x my net pay i’m negative net worth.

seems like rent vs. own makes this number swing wildly and unhelpfully. my net worth was positive when i was renting despite still having ~200k in loans. now i paid almost all of them off and made a conservative home purchase and my net worth dropped? seems odd and unhelpful right?

Why would you count the value of the mortgage but not the value of the house in your net worth?

yeah i feel like an idiot, that’s what i was doing.

not…. smart….

This is a pretty safe place to make little errors like that. You should have seen all the stuff I screwed up in today’s post.

This might be an odd question, but for those of us who might be trying to track our net worth prior to or during residency, do you think this formula can be extrapolated back through the residency years? or would you recommend some other way to estimate how we are doing? I like the ability to compare against a rule of thumb, since it helps see if you need to do more or are on the right track, rather than looking a big ole negative number…but there doesn’t seem to be a good estimate (or I haven’t seen it) for students or residents to compare their net worth to

The main factor in the net worth of a student/resident is the school they attended and the family resources they had to attend that school. Seems silly to try to come up with a rule of thumb for that.

I am looking at this thread of emails several years late. When I am estimating my net worth in the future I am using 4% or 5% potential growth of my portfolio. I have difficulty factoring in inflation to these calculations. I plan to retire in 13 years and estimate I need 4M to retire. I have approximately 2.3M between taxable and non taxable investments with a 70/30 stock/bonds-cash portfolio. I estimate I should be able reach 4M keeping with my current strategy in 13 years but I am not sure if I should be multiplying this by 2 (need 8M in tomorrows $?) to account for inflation etc. Any advise would be great. thank you

That would be a fairly high rate of inflation to require twice the money in 13 years. At 3%/year, you’d need 47% more in 13 years.

Thank you. That makes sense. I just learned of the WCI and am very glad I did. I have been practicing for 12 years and wish I had discovered it earlier! Big fan already.

Happy Holidays

Welcome to the community and thanks for what you do.

Great article!! We paid off our house this year and are completely debt free!! Since primary homes are a liability and not an asset, do you include the house value in your net worth calculation. Also, any good formulas to figure out how much in liquid assets you need to retire with taking inflation into account? We live very comfortably and still way below our means but not sure what the equivalent of living on 150k/year would be in 25 years from you. Thanks so much!!!

Yes, but I wouldn’t include it in your retirement nest egg. A home isn’t completely a liability, even if it has characteristics of one. It pays “dividends” in the form of saved rent and is likely to appreciate over time.

25X what you spend is the most commonly used formula. That already accounts for inflation. $150K*25 = $3.75 million. If you retired today, you could probably expect $3.75 million to provide you $150K in today’s dollars from now until you die. If you want to be more conservative, you can use 30X or 33X.

I’m retiring from the military as FM with prior service longevity, with a $4800 monthly retirement for life… or equivalent to a $960k lifetime annuity (discounted at 6% per William Berstein), or simply $1.7M in today’s dollars with 30+ years of life expectancy. My back aches a little from the military service, but I’m not complaining.

My back aches too, but I can’t blame it on any military service.