How Does Your Personal Capital-To-Income Ratio Stack Up with This Recommendation?

by Darwin on December 18, 2011

Capital to Income Ratio

Today I’m highlighting the capital to income ratio, which I’d heard about before, but hat tip to White Coat Investor (good new finance blog I found which you should check out) for making me rethink it and share again here.  Basically, this is one of the many ratios that Charles Farrell focuses on in his book Your Money Ratios.  The capital to income ratio is a basic measure of your retirement savings divided by your current income.  Why does this ratio matter?  Because it gives a good measure as you progress through your life where you should be.  Too many Americans coast through life enjoying life in the moment without regard for “saving for a rainy day” (retirement).  Some of the drawbacks of the measure, as I see it, include the following:

  • One-size-fits-all approaches are usually flawed.  This is the case when when to refinance a mortgage, what % of your salary you should spend on a car, an engagement ring (that one money salary thing the industry thought up and puts in their ads is annoying), and many other measures that “experts” tout.  Much depends on your personal situation.
  • Incomes and Expenses Change.  As you progress through life, your current income could jump all over the place (like my wife is home with the kids now but will be back to work in 5 years, so does that mean in 5 years, my income savings are suddenly deficient?).  Additionally, when my kids hit college years, unless I have all 3 kids’ 529 plans fully funded (which is my goal), I’ll be paying for part of their tuition from my current earnings.  That means less to put toward retirement in those years, hence, I need to accelerate my retirement savings before the dreaded college bills start coming in.

However, you’ve gotta start somewhere!  And using the table below as a barometer to measure yourself against as you age beats blissful ignorance of what your future needs will be in retirement.

Capital to Income Ratio Recommendations

Here’s where you should be at according to the recommendations:

Age Capital to Income Ratio
25 0.1
30 0.6
35 1.4
40 2.4
45 3.7
50 5.2
55 7.1
60 9.4
65 12


What is My Capital to Income Ratio?

Ironically, when I calculated mine, I’m roughly right in line with where we should be.  I hadn’t previously looked at the measure in detail and hence, I’d never planned my retirement savings to the goals in the table, but I’m 36 and my ratio is about 1.5.  So, while I often think I should have more saved by now, or that swimming pool we put in last year could have gone a long way toward college and retirement, I’m encouraged that all the extra money I’ve been putting toward the kids’ college and our retirement has me on-track for a responsible financial future.  We all make the same financial miscalculations because we’re wildly optimistic, you switch to joint finances, or basically, things change.  But rather than flying blind, this is a nice measure to take with you as you age, and it becomes increasingly important as you reach your retirement age (albeit, much tougher to influence with so little time remaining).


What Is Your Capital to Income Ratio?

Are You Pleased, Concerned, or Ambivalent About Your Ratio?

{ 14 comments… read them below or add one }

krantcents December 18, 2011 at 8:50 pm

Although I am 65, I will not formerly retire (again) until 70. Depending on the volatility of the stock market on any particular day, I exceed the capital to income ratio by a lot. The funny thing is I want to add more because of the unknown!


Darwin December 21, 2011 at 10:06 pm

Wow, really? I figured as a teacher you probably have a decent pension coming your way which would help buffer whatever nest egg you have. Is there a mandatory retirement age for teachers or you envision just working in some other capacity through 70?


Maggie@SquarePennies December 18, 2011 at 10:49 pm

Gotta agree that no rule fits everyone. We are retired and still save from our income. The current volatility makes it smart to invest conservatively–especially for our age.


Darwin December 21, 2011 at 10:06 pm

Totally; it all depends on time horizon. I’m as aggressive as it gets now, but will have to ratchet down by late 40s I suppose.


101 Centavos December 19, 2011 at 9:21 am

According this rule, I’m lagging. However, that would change drastically were we to sell one house and just rent, or live in the other paid-off country cabin.


Darwin December 21, 2011 at 10:07 pm

True, home equity doesn’t count toward retirement savings but that’s always an option which is a gamechanger for the ratio!


retirebyforty December 19, 2011 at 4:32 pm

We are doing well according to this ratio. You are correct about the income fluctuation though. When I quit my job, this ratio would shoot up dramatically. I think we base too many things on income. Sometime I think using the poverty line or something fixed would be better. For example 10x the poverty line would be ok, 20x would be good… etc…


Darwin December 21, 2011 at 10:09 pm

I think for many, it’s tough to make a dramatic change to lifestyle. So, our family could live on much less, but without a reason (like job loss or worse), it would be difficult (and probably unnecessary) to live at a level like 1/5 current income or whatever. But I suppose as we approach retirement, if I’m making the equivalent in today’s dollars of X and have to live on a fixed income of .5X, it would still be well above the poverty line and I imagine we’d be ok. Just not what we planned.


White Coat Investor December 20, 2011 at 3:09 pm

Thanks for the shout-out! I published another post on another one of Farrell’s ratios- the debt to income ratio today.

None of these ratios are perfect, but it’s always fun to see how you stack up! And if you’re way above or below the ratio it gives you something to think about and perhaps even a little motivation to not be such a miser or such a spendthrift.


Darwin December 21, 2011 at 10:10 pm

Yeah, I like that ratio (bc I was on track LOL)… no, but seriously, some of the other ones didn’t seem as relevant or helpful, but this one really jumped out.


KD December 23, 2011 at 11:19 am

A ratio of retirement savings to basic expenses is more illuminating I think. Basic expenses would include home, food, transportation, health, life insurance. A multiple of 25 would be awesome. At 30, capital-to-income ratio is 1.58, but capital-to-basic expense ratio is 5.4


Funny about Money December 31, 2011 at 7:51 am

AT 65 you’re likely to be retired. So…should this ratio be based only on your Social Security and whatever little jobs you can scrounge up on the side, or should it be based on your SS income + your drawdown from savings (which amounts to a kind of income, since you need it to live on)?

I think this ratio is unlikely. If I base this on my SS and drawdown combined, I come up with just $476,000, which is nothing like enough to live on should I survive into my 90s…or even just my 80s.


Bill January 5, 2012 at 8:15 pm

Interesting. I am pretty much bang on for 3.7 at 44 years. Although that ratio has improved dramatically in the past 2-3 years as I have focused on saving more and grown my income. I am a contractor, so my income varies a bit (I averaged the last 3 years).

Retiring with 12X your salary seems a bit light, but it depends upon whether you have government or private pensions coming to you as well.


Terry January 20, 2012 at 2:30 am

Recommendation for a 50-year-old earning minimum wage is over $75K.

Is that realistic?


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