Secrets to Financial Success: It’s as Easy as 1-2-3

Forget the complicated equations and programs. You don’t need a computer or even a calculator.  One of the most revealing ratios used by financial planners to measure whether you are on track to meet your financial goals is also one of the easiest.  It’s the Assets to Income Ratio, and looks at whether you have accumulated enough savings for retirement, given your current age.

How to Compute It

Compare the value of your total savings to your annual income to see if you are on track for retirement.  Hint: ignore the value of any equity in your home but do include your 401(k), IRAs and other investment accounts.  For example, if your investments total $200,000, and your before-tax income is $100,000, your ratio is 2:1 (your assets are equal to 2 times your income).

How Do You Measure Up?

You get a passing grade if your accumulated assets hit these targets at each age:

Age 35: Assets equal to 1-2 times your income

Age 45: Assets equal to 3-4 times your income

Age 55: Assets equal to 6-8 times your income

Age 65: Assets equal to 10-12 times your income

What to Do if You are Behind Target?

In some cases, you may be better off than your Assets to Income Ratio would suggest.  For example, if you will receive a healthy pension, or can count on two sizable Social Security benefit checks in the household, or have your mortgage fully paid off, then you may be able to get away with lower asset levels.

Otherwise, if haven’t progressed to where you should be, you may still be able to meet your goals if you ramp up your savings, plan to work longer, or are willing to substantially downsize your lifestyle in retirement.  Ask your financial advisor to discuss the available options and customize a plan for you at your next review.

If the target amounts you need to save seem high, there’s a reason for that.  Keep in mind that, for every $100,000 you have saved, you may be able to safely spend only $4,000 to $6,000 per year in retirement to ensure that your funds last thirty or more years.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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