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Ratios for Retirement

April 7th, 2008 at 06:10 am

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!!!

9 Responses to “Ratios for Retirement”

  1. Broken Arrow Says:

    My savings to income ratio right now is roughly 58.8% to gross. But, I'm also a relatively low wage earner, so it's not as impressive as it may seem in terms of dollar amounts... and it's temporary.

    My debt to income ratio is 0%, but no mortgage or rent right now....

    But yes, let's get crackin'! Smile

  2. ceejay74 Says:

    So if you don't include home equity in your savings, do you not include your mortgage in your debt amount?

    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).

  3. Aleta Says:

    This was a great article but a long one. I would need some time to really read it through. There are some inciteful points to look at.

    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.

  4. merch Says:

    I did include mortgage in my debt but not house equity in the saving column. To me, it makes sense because the mortgage directly effects what I need as far as monthly income. But, the home equity, I am not looking at tapping for retirement expenses.

    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.

  5. terri77 Says:

    Thanks, this is good information. I guess I would include mortgage in both or not at all. If it's not equity then I wouldn't consider it a debt either, but a monthly expense. Either way, I think I'm well on my way to having a comfortable retirement.

  6. scfr Says:

    As you pointed out merch, these charts always need to be taken with a grain of salt because there are so many variables.

    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).

  7. monkeymama Says:

    Well, right on for retirement this year. Though we are aiming more like 15% next year.

    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.

  8. monkeymama Says:

    P.S. Sick of me yet? I didn't include home equity in savings ratio either. Maybe I read that wrong. I thought you were talking net worth. Net worth, yes. Savings, no.

  9. merch Says:

    monkeymama, I always like your comments. we look at things from slightly different angles.

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