How much in savings and investments should you have by age 35 or 45? Or, for that matter, at 65 when you're likely to be near retirement?
If you don't know, you have plenty of company. So many figures are bounced about that it's often difficult for people to know what's the right amount. Many workers end up saving what they can and hoping for the best.
That's why some financial advisers now use a simple yardstick to help clients quickly see how they measure up. It suggests the amount of savings and investments you should have in relation to income at different ages.
For example, at 35 your assets should at least equal your annual income. The formula is by no means gospel, but it's a useful tool to check if you're largely on target, need to save more or should revise your retirement plans.
The idea comes from Charlie Farrell, a Denver investment adviser and author of the book "Your Money Ratios: 8 Simple Tools for Financial Security."
Farrell says financial ratios are used to simplify complicated data for investment professionals analyzing companies. He figured workers could use a similar shortcut for personal finance.
Mari Adam, a financial planner in Boca Raton, Fla., says she uses ratios based on Farrell's book with clients.
"I like it because it is very simple," she says. "When you do retirement planning, it's so complicated, people just don't get it."
The math is easy. Add up all your bank accounts, 401(k)s, individual retirement accounts and other investments. Don't include the equity in your house. That's because, Adam says, "most people still need some place to live and don't take steps to downsize and sell the house."
Younger workers in their mid-20s aren't likely to have a lot of assets built up. What's key for this age group is to get started with saving and investing. Contribute at least enough in a 401(k) to get the employer match if you can't afford to do more now, Adam says. But — and this is crucial — don't forget to increase the contributions 1 to 2 percentage points annually to catch up.
For all other age groups, Adam uses the ratios listed below. Other advisers, she notes, use even more stringent savings targets. Still, if you're not a good saver now, these benchmarks will appear steep:
•Assets at age 35 should equal one to two times yearly gross income.
•Assets at 45 should total three to four times income.
•Assets at 55 should be six to eight times income.
•And at 65, assets should equal 10 to 12 times income.
"These are aspiration levels," Adam says. And if you can't meet them, she says, it doesn't mean you can't retire.
You might be able to get along with having fewer assets if there are other financial factors in your favor. For example, Adam says, you could get by on less if your mortgage is paid off or if you will receive a fat pension or ample Social Security check in retirement. Or, she adds, if you are truly frugal.
But if you're short on savings, you still have time to make changes to improve your finances.
You can squirrel away more, work longer or take a part-time job in retirement. Or delay Social Security benefits until as late as age 70, so you'll get a bigger check. And you can always free up home equity by selling a pricey house and moving to a more modest place.
The benchmarks Adam uses aren't that far off from what T. Rowe Price recommends, says Stuart Ritter, a financial planner with the Baltimore-based investment company.
Price, though, offers another way for workers to look at retirement savings. It calculates how much you should be saving at different ages based on how much you have already put away.
For example, if you're 35 and have assets worth twice the amount of your annual income, then you need to save 12 percent a year to stay on target, Price calculates. But if you're 55 and have saved only three times your income, you will need to squirrel away 32 percent of pay annually.
Ideally, all of us would begin our careers saving 15 percent of gross pay annually, Ritter says. If your employer provides a 401(k) match — say, 3 percent of pay — then you can save 12 percent.
At this savings rate and with the money invested in a diversified, age-appropriate portfolio, you should be able to maintain your lifestyle in retirement, Ritter says.
But many of us don't start out putting away 15 percent of pay. And some workers begin contributing only the minimum to a 401(k) to get the employer match and then stop there.
It's sort of like the doctor advising you to exercise 30 minutes a day, Ritter says, but you work out only six minutes. "If six minutes at the gym sounds ludicrous, you should have the same reaction to saving only 3 percent for retirement," he says.
Sometimes workers wait until they've been in the labor force for a decade or more before they start saving. And the longer they delay, the more they must put aside.
Start saving at age 35, for example, and you will need to put away 20 percent of pay each year, Price calculates. But begin at 45, and you must salt away 29 percent of income annually to get on track. Start at 55, and a whopping 43 percent of pay must be set aside for retirement each year.
For some, any of these savings targets will be overwhelming, given the amount of debt they shoulder. But there's a guideline on debt, too.
Farrell, the Denver adviser, says debt — including a mortgage — should never exceed twice your annual income. "If debt is higher than two times your pay, it's very hard to have extra income to save," he says.
And by age 65, he adds, you should be debt-free. That way, if the financial markets plunge, you aren't forced to sell investments at a loss to pay the mortgage.
Of course, people living in areas of the country where housing is expensive might balk at Farrell's guidelines. But Farrell says that if high house payments prevent you from saving enough for retirement, you need to plan how you will make up the shortfall later — including selling the house.Copyright © 2015, The Baltimore Sun