How The Ratios Work
One of the ratios I have developed is called the Capital to Income Ratio (CIR). This ratio tells you how much capital (or savings) you should have at your age if you want to retire. I have three different Capital to Income Ratios for three different retirement scenarios based on your target retirement age and desired income replacement rate.
The income replacement rate simply means the percentage of your current income that you would like to live on once retired. For instance, if you want an 80% income replacement rate and make $100,000, you would be looking to live on $80,000 a year in retirement.
Gold – Retire at age 65 with 80% income replacement
Silver – Retire at age 65 with 70% income replacement
Bronze – Retire at age 70 with 70% income replacement
Bronze Standard Example
To use the ratio, you simply take your current income and multiply it by the CIR at your age as listed to the right. The number you get tells you how much you should have saved at your age if you want to be on track to retire at age 70 on 70% of your income. This way, you can tell if you are on track, ahead or behind, and by how much.
Using The Ratios
Let’s assume you make $100,000 a year and are 50 years old. Your CIR at that age is 3.5, so you multiply $100,000 by 3.5 and you get $350,000. This is how much you should have saved by age 50.
If you reach age 70, you should have a CIR of 10, or 10 times your pay. Using the same $100,000 that means you need savings of $1,000,000. If you have savings of $1,000,000, in retirement a fair estimate on distributions is that you can take out about 5% a year. If you did that, you would have $50,000 of income from that portfolio each year (adjusted for inflation) and it should last you your entire lifetime.
Then add to the $50,000 an estimated Social Security benefit of $20,000 and you are at $70,000, or 70% of your pre-retirement income. All you need to do is focus on hitting your CIR at each age and staying on track.
Of course, the higher the income replacement rate and the earlier you want to retire, the more you need saved.
For each of the CIRs, there is also a unique Savings Ratio that tells you how much of your annual income you need to be saving at each age if you want to stay on track for your CIR.
For instance, to the right is the Savings Ratio when using the Bronze Age 70 and 70% CIR. You use this Savings Ratio the same way you do the CIR, just take your income and multiply it by the ratio. So if you’re age 50, your Savings Ratio is 10%, which is $10,000 a year.
There is a unique Savings Ratio for each of the different retirement scenarios. As you aim for a higher income replacement rate and earlier retirement, the Savings Ratio of course goes up.
Now you can put them both together in one chart and see how much you should have saved at your age and how much you should be saving each year to stay on track:
The 8 different ratios are built out in this matrix, and it makes it very easy for you to get a sense of where you are going and what you need to do to get there. The charts are broken down into five year increments, and if you buy the book, you get access to the calculator on the site to run your exact ratios based on your age and income.
I have the Age 70 and 70% Income Replacement calculator available for anyone to try if you’d like to get a sense of how it works.