So, I came into work this morning and it was a little slow at 7:00. So I decided to cruise the web a little and found an interesting article on retirement ratios from the Financial Planning Association.
The article talks about looking at three financial ratios. They are all based on income and are savings to income, debt to income, and savings rate. There are 2 tables in the article: one for a 5% real rate of return (think 8% return on portfolio) and 4% real rate of return.
The author doesn’t include home equity into the savings ratio, which I agree with. You have to live somewhere and most of that equity is going to be tied up in that home, so better not to include it.
Anyway the article is at: http://www.fpanet.org/journal/articles/2006_Issues/jfp0106-art6.cfm
So are you on target?
Personally my savings is a half what it should be, I am carrying 50% more debt, but I am looking at saving 12% - 15% this year. I got a lot of work but I got 1 year before I hit the age milestone.
Time to get cracking!!!
Ratios for Retirement
April 7th, 2008 at 01:10 pm
April 7th, 2008 at 03:36 pm 1207582617
My debt to income ratio is 0%, but no mortgage or rent right now....
But yes, let's get crackin'!
April 7th, 2008 at 04:38 pm 1207586288
I'll have to do the math when I get a slow moment at work, but I imagine my totals either look horrendous (without mortgage debt) or super-horrendous (with mortgage debt). But like you, I'm clawing my way back and expect to look a lot better each year (though I don't know when/if I'll ever be all the way on track with the age milestones).
April 7th, 2008 at 04:42 pm 1207586553
Ceejay74: The reason you don't include your house is because it is an expense and is not creating any income for you. On the other hand an investment property gives you income and that's why it's included.
April 7th, 2008 at 05:04 pm 1207587887
What I like is the math and ratios are quick and don’t have to me too precise. I also like that the author has put together some benchmarks that you can quickly see where the issue is (too much debt, where should I be, etc.).
The issue I do find on this is 2 fold. If your income jumps considerably, then all the ratios are out of whack. The second is if you plan on retiring on less than you make. Let’s suppose you work in NYC making $200k a year and plan on retiring in NC. You may only need an income of $80k a year.
Of course the good news is that you can change the denominator in the ratio and quickly benchmark the numbers to see if you are in line.
April 7th, 2008 at 05:23 pm 1207588983
April 7th, 2008 at 10:48 pm 1207608516
I always wonder what they mean by "income"??? Gross? AGI? In either case, yes, we are a bit ahead on our savings and have zero debt. ***This is the point where I stop to knock on wood very hard.***
I assumed I should deduct the portion of our savings that are allocated for other purposes (new house, car, etc).
April 10th, 2008 at 02:03 pm 1207836192
We have about 1.5 ratio for savings.
Our debt ratio is 3.
I would hardly sweat our debt ratio since it's only our mortgage and is much cheaper than rents in the area. Likewise, it doesn't seem to be hurting our savings ratio. (Age 30). But I guess, more importantly, I expect our debt ratio to decrease steadily with time. Gone in our 40s, ideally. So on track in that regard.
I always enjoy these benchmarks though. Sure you take them with a grain of salt. But always interesting to measure progress.
April 10th, 2008 at 02:08 pm 1207836488
April 10th, 2008 at 03:12 pm 1207840333