How much should I have saved for retirement, depending on my age? This was a question asked at our October meeting, and I found an article in the Journal of Financial Planning which provides help in determining an answer.
The article by Charles J. Farrell, J.D., L.L.M., Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement, sets forth a set of personal financial ratios for individuals from age 30 to 65 (savings to income, debt to income, and savings rate to income), with the objective of reaching age 65 with no debt, and in a position to generate approximately 60% of your pre-retirement income from savings. The theory is that investors need to get their finances–income, debt, and savings–into proper balance. Because the ratios are based on an individual’s income, anyone can use them for their own situation.
The assumptions behind the ratios are stated, so that if your assumptions are different (e.g., rate of return, distribution rate in retirement) you can adjust the results accordingly. While the article is aimed at financial planning professionals, the explanations and examples used in the article are very clear, so I recommend taking a look at it.
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Linked with pemission by the Financial Planning Association, Journal of Financial Planning, January 2006, Charles J. Farrell, Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement.
