Monday, December 25, 2006

Financial Savings Targets

A key aspect in developing ones investment plan is establishing a financial plan to ensure goals and objectives are being achieved on an ongoing basis. An important component of the plan is the development of specific asset value targets to be achieved on an annual basis.

An article recently published in the Journal of Financial Planning, Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement describes a process to determine what level of investment assets may be required in order to retire in comfort.

The article contains the following 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."
The article concludes by stating, "...ratios also provide households with a practical tool for analyzing their personal finances and the progress they are making toward financial independence." The article provides a process an investor can go through in determining appropriate levels of retirement savings needed at various stages in their lifecycle.


Source:
Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement
By: Charles J. Farrell, J.D., LL.M.
January, 2006
http://www.fpanet.org/journal/articles/2006_Issues/jfp0106-art6.cfm


No comments :