Journal of Financial Planning: January 2006
Executive Summary
- Investors commonly use stock ratios such as the price to earnings, price to book, and dividend yield to assess the financial health of a company because the ratios concisely benchmark a company's financial status.
- Clients and their financial advisors have no comparable ratios that would allow investors to conduct a similar analysis of their personal financial circumstances. This article establishes a set of personal financial ratios that individuals can use to analyze their financial standing. Just as stock ratios are primarily based on a company's earnings, the personal financial ratios are based on an individual's income. There are three ratios: savings to income, debt to income, and savings rate to income.
- The ratios are derived from a series of assumptions including household budgets, post-retirement income replacement, rates of return, and retirement distribution rates.
- The ratios are designed to serve as a road map so that investors can compare their individual ratios against the benchmarks to determine whether they are on track to retire by age 65. The ratios serve as a practical tool for advisors to help convey to their clients the fundamental relationship between one's income, debt, and savings rate, and how those relationships must change over time.
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Topic
Research
Retirement Savings and Income Planning