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March 14, 2006

Savings ratios

Most people don’t devote a lot of time to their personal financial planning, even though such planning is important. Instead, they look for shortcuts or rules of thumb to help guide their financial futures. Dr. Mike Walden, an N.C. State University economist, considers one such guide for retirement savings.

“Because people are busy ... they just can’t do all the crazy calculations that an economist or an accountant do,” says Walden, a specialist with the North Carolina Cooperative Extension Service. “So I have to give credit to this person, a financial planner in the country named Charles Farrell [who] recently published I think some very easy rules for retirement planning.

“What he did is he developed multiples of your annual income that you need to have in a savings account targeted toward your retirement,” Walden says. “For example, he says at age 35 you should have savings equal to 90 percent of your income targeted toward retirement.

“At age 45 that savings should have increased to three times your income, and at age 55 it should be six and a half times your income.

“Now this assumes you have no other source of savings other than Social Security for your retirement. He says if you have a company pension, what you need to do is to subtract that annual pension first from your annual income, then develop and apply the multiples.”

Posted by deeshore at March 14, 2006 08:00 AM