Aside from What is the market going to do, this is the question I get asked most as a financial advisor.
One of my favorites ways to answer this question is a technique that I read about in Your Money Ratios: 8 Simple Tools for Financial Security, a book by Charles Farrell. In his book, Charles addresses this question with something he calls The Capital to Income Ratio (CIR). A good estimate is that you will need to accumulate capital worth about 12 times your gross annual income at age 65. This should put you in a position to live on about 80% of your retirement income.
You start out with zero capital when you are young, save a portion of your income each year, and ultimately try to accumulate capital worth 12 times your pay. The Capital Income Ratio can help tell you how much capital you should have accumulated at various points between ages 25 and 65, so that you stay on track to reach 12 times pay at retirement.
Figuring out your CIR
To begin, look up your age and the corresponding Capital to Income Ratio figure in the chart below. Then multiply your household income by the Capital to Income Ratio. This tells you how much capital you should have accumulated at your age.
An Example:
Let’s assume that you are 40 and have a household income of $100,000. The Capital to Income Ratio at age 40 is 2.4. This means you should have 2.4 times your income in savings or $240,000 saved. Now add up what is in your 401k, IRAs, savings, and investment accounts and compare it to that figure. This will tell you if you are ahead or behind in your goals. If you are not on track, you can make adjustments and get back on track in a few years.
Your Age – Capital to Income Ratio (the multiple of your annual income you should have accumulated)
25 – 0.1
30 – 0.6
35 – 1.4
40 – 2.4
45 – 3.7
50 – 5.2
55 – 7.1
60 – 9.4
65 – 12.0
Am I on Track For Retirement?
