Ever wonder if you are saving enough for your retirement?
You should organize your savings and investments according to ratios. In the field of corporate finance and taxes we are always using financial ratios to determine the health of a company. Ratios can also be used to determine if you are living a healthy financial lifestyle and if you are on the right track for retirement.
The key to a good retirement fund is to analyze the ratio of your income to capital (or financial assets) to know where you should be at every stage of your life. In your 30’s you should have 60% of one year’s income already in your retirement fund. In your 40’s you should have 2.4 times annual salary saved, in your 50’s – 5.2 times and in your 60’s – 9.4 times.
When you reach the age of 65 your goal should be to have 12 times your annual salary in your retirement fund. That would put you in a position to retire with about 80% of your current annual salary. You need to be saving 12% of your pay every year between the age of 25 to 45 and 15% between the ages of 46 to 65 to enable you to achieve this goal.
The housing market prices have put most people in a position of having too much mortgage debt. In the early 1970’s the average cost of a house was 2 times annual income. Over the years the cost of housing has increased dramatically which has caused mortgages to escalate.
The average cost of housing is now around 4 times your annual salary and therefore your mortgage payment consumes 30% of your household income. So where did people get that extra money for their higher mortgage payments? They just stopped saving, so the mortgage has just crowded out all their other financial objectives.
Have No Debt When You Retire. The goal of housing should be to purchase a modest home you can reasonable afford where the mortgage is low enough so you can save 12 to 15% of your pay and enable you to get your mortgage paid off by the time you reach 65. That way you have a rent free place to live and far more flexibility to live off your financial assets in retirement. Having no debt in retirement is vital.
The Diversification Ratio. Many people often go with a much more risky portfolio than they really should. Prior to 2008 having a ratio of 50% stock and shares and 50% fixed bonds during most of your pre-retirement years was considered a reasonable strategy.
This is no longer the case because the middle to low income earner has had their finances go into crisis mode with inflation on the increase, job losses and home foreclosures. Interest rates and low risk investments have declined with savings accounts no longer earning 5% and bonds no longer earning 10% interest as they did years ago.
Once you understand how the ratio of income to capital works you will understand how important it is not only to build your savings but also to protect it. Let’s say you have an income to capital ratio of 10 times your annual pay at age 60 and your primary equities are in stocks and mutual funds.
Then the stock market goes into a decline and you wake up at age 60 with only 5 times your yearly salary in your retirement account and now you cannot afford to retire! It is very risky to invest too high of a proportion into stocks and mutual funds as the market can be way too volatile.
Good Risk Diversification. A way to a successful retirement portfolio is to have risk diversification. A good ratio of diversification would be to invest 40% in high risks 20% in fixed bonds and 40% in precious metals. Precious metals have consistently outperformed most types of investment over a long period of time. Take a look at Gold Price History.
In the last 40 years gold prices have increased by more than 5,000%. In just the last 10 years gold has increased by 640%. Gold prices were dramatically increasing during 2008/2009 while most stocks were plummeting.
In fact, history has proven that when the economy is in decline the price of gold always seems to increase making a precious metals account, Gold IRA the perfect way to diversify your retirement plan.