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How to Get on Track for Retirement, Ep #149

get on track for retirement

Are you on track for retirement? Do you have enough money saved at this point in your life to retire or reach financial freedom by 65? One of the biggest questions I hear is: How much money do I need to save for retirement? In this episode of Best in Wealth, I do my best to answer that question using the formula Charles Farrell outlines in his book, Your Money Ratios: 8 Simple Tools for Financial Security at Every Stage of Life. You need to take actionable steps now to be prepared for your future.

Outline of This Episode

  • [0:35] What do you dream about doing?
  • [3:58] Are you on track for retirement?
  • [11:15] Why you need 80% of your current income
  • [13:51] How do you come up with the $60,000?
  • [17:37] What’s your job now?

Get retirement ready with Charles Farrell’s formula

You need to create a detailed retirement plan to really zero in on your goals and get the right steps in place to prepare. In his book, Charles Farrell shares a simplified version of how much savings you will need. I will give you some simple guidelines from his book that demonstrate where you should be at each stage of life. The goal is to hit at least 12x your household income in order to retire.  This will enable you to live off of 80% of your household income in retirement.

Charles developed the Capital to Income Ratio. You can use it to find out if you are on track to get to 12x your income by the time you retire. If your household income is $100,000 annually, you need to save $1.2 million for retirement. So where do you need to be at each age?

Here are the income ratios by age, with the approximate amount you should have saved if your household income is $100,000 annually:

Age Income Ratio Savings Required
25 0.1 $10,000
30 0.6 $60,000
35 1.4 $140,000
40 2.4 $240,000
45 3.7 $370,000
50 5.2 $520,000
55 7.1 $710,000
60 9.4 $940,000
65 12 $1.2 million

So are you on track for retirement?

Based on the table above—are you on track for retirement? Here’s how to calculate it:

Take your household income and multiply that by the income ratio that correlates with your age to see if you are currently on track. It is easy to calculate if you are paid a salary. If you are not, count the average of your pay for the last 4 years as your income.

By the way, by money saved, we are talking about things such as your 401k, IRA, annuities, CDs, life insurance, checking and savings, real estate, etc. Please note that your home is NOT a capital investment.

How do you live on 80% of your current income?

How do you live on 80% of your current income in retirement if you need 100% of it now? Where did Charles come up with that number? If you are going to get to 12x your income by retirement age, you have to be saving 12–15% of your $100,000 annual income to get there. If you are saving 12% now, you really only need 88% of your income to live off of. In retirement, you w ill not be saving for your retirement anymore.

Plus, your mortgage should be paid off by the time you retire. If your mortgage accounts for 20% of what you pay and we take off another 12% for savings, 7.65% for social security taxes, that brings you down to $60,000. So you really only need $60,000 to live off what you are making right now. Social security will play a role—it typically replaces 20% of your income. If you are making around $100,000 a year, it will make up the other $20,000 to bring you to the projected $80,000 a year in retirement.

You want that extra $20,000 cushion to account for things like yearly inflation, medical expenses, or perhaps even vacations. Keep listening to find out why I think the 5% rule can be dangerous—and what I think you should do instead.

What is your job now?

But Scott, what if I’m not on track?

Are you anywhere close? What if you have fallen behind? If you are not on track for retirement, your job is to get on track. Once you figure out what you should have saved at your current age, there are some things you can do:

If you are 50 years old and you do not have half a million saved yet, start saving more than 12–15% a year. Or perhaps plan on working a couple more years and retiring at 67. Remember, when you retire is not always your decision. It’s better to have a plan in place now in case things do not go the way you had expected.

What if you are ahead? It’s time to start dreaming big and start thinking about the one thing you want to accomplish with your future. Either way, you need a comprehensive financial plan. Feel free to reach out and schedule a conversation with me!

Resources Mentioned

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Podcast Disclaimer:

The Best In Wealth Podcast is hosted by Scott Wellens. Scott Wellens is the principal at Fortress Planning Group. Fortress Planning Group is a registered investment advisory firm regulated by the Securities Act of Wisconsin in accordance and compliance with securities laws and regulations. Fortress Planning Group does not render or offer to render personalized investment or tax advice through the Best In Wealth Podcast. The information provided is for informational purposes only and does not constitute financial, tax, investment or legal advice.

About the author, Scott Wellens

Scott Wellens, CFP® is an investment advisor and founder of Fortress Planning Group. After earning his Bachelor of Science degree from the University of Wisconsin-Oshkosh, Scott quickly ascended to become a Vice President of North American Sales at a major regional provider of telecommunications infrastructure. While financially successful in this role, Scott searched for ways to pursue his passion related to financial literacy and providing financial freedom for both his own family and others. During his search, Scott became curious about the significant gap he found in the financial services sector: he was unable to find a comprehensive financial planner that maintained a family stewardship lens without being attached to financial products. Scott decided to fill that gap by creating his own planning firm that maintains a strong passion for comprehensive, unbiased wealth planning that is genuinely client-centered.

Scott resides in Menomonee Falls, WI with his family. He is the father of three active and independent daughters who keep him on his toes. Scott is an active community member, serving on the Hamilton Education Foundation Board, serves as a Dave Ramsey Financial Peace facilitator and leads the All Pro Dad’s group at their local elementary school. Scott enjoys spending his free time visiting state parks with his family, reading, and watching the Milwaukee Bucks and the Green Bay Packers win ball games.

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