Capital to Income Ratio
“Half our life is spent trying to find something to do with the time we have rushed through life trying to save.” –Will Rogers
Do I have enough to retire?….Am I saving enough for retirement? Without a doubt, these are the type of questions I get asked most frequently.
Certainty, everyone’s situation is different. However, Charles Farrell, author of the book, Money Ratios, has probably the formula I’ve seen. It’s called the Capital to Income Ratio. Sounds complicated but it’s actually super easy to use. Farrell’s formula is a great guideline for how much you should have saved at various ages. You just multiply your current salary by the ratio in the following chart.
So for example, if your 40 years old and making $100,000/yr, you should have around $240,000 saved for retirement ( 100,000 x 2.4). The ratios are a good guide to determine if you need to save more, spend less or retire later to reach your goals. The goal is to have 12x your income stashed away for retirement. This would allow you to spend about 80% of your current earnings.
Saving 12x your income and adding in social security benefits should provide for a comfortable retirement.