NCPA - National Center for Policy Analysis


March 29, 2005

Many Americans would be shocked by the savings and debt guidelines put together by financial consultant Charles Farrell, says the Wall Street Journal. He says Americans are servicing too much debt, including mortgage debt, and not saving enough for retirement.

According to Farrell:

  • At age 30, you should limit total debt to 1.7 times income.
  • At age 45 with an annual income of $70,000, you ought to have $210,000 saved for retirement and just $70,000 of debt.
  • If you are 65 and about to retire, he believes your nest egg should be equal to 12 times your income.

To many people, these will seem like an impossibly large sum, but according to the Journal, the table's targets are not stringent enough. The ratios are based on three key assumptions and all three may be a tad optimistic, says the Journal.

  • First, Farrell assumes your retirement savings will earn about five percentage points a year more than inflation.
  • Second, he assumes you will save 12 percent of your pretax income for retirement every year from age 30 to 65.
  • Third, he is too generous with retirement withdrawals, assuming a 5 percent withdrawal rate when most financial experts advise just 4 or 4.5 percent.

Farrell blames today's highflying real estate market for the lack of savings. People are investing too much in real estate, believing they can cash out some of their home equity and retire in style. However, even if the real estate market continues to grow and home prices hold, people have still hindered their ability to save. Owning a home means big mortgage payments, maintenance expenses, property taxes, utility bills and homeowners insurance.

Source: Jonathan Clements, "Ugly Math: Soaring Housing Costs Are Jeopardizing Retirement Savings," Wall Street Journal, March 23, 2005.

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