We often hear financial bloggers preach that different people requires different needs in different situations.
The amount of savings a person needs is highly dependent upon how much he earns and spends, and going back further how much a person earns and spends is very much dependent upon his education qualification and judgement of what is enough.
Chris Farrell, author of “Your Money Ratios” has some rule of thumb regarding how much capital a person should have at their respective age. The way he did this is through a ratio of the Capital to Income (CIR) which means this could technically applies to everyone.
| Age | Capital to Income |
|---|---|
| 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 | 12.0 |
So for example, if you are currently 30 years old and earning pre-tax income of $70k/year, you should have an allocation of capital of around $70k x 0.6 = $42k.
The figure may look somewhat conservative to you but you’ll be surprised at the number of people who doesn’t have that kind of savings at their age of 30.
The way the ratio is structured probably also ascertain a few assumptions that your income will increase proportionately as you age older and assume a withdrawal rate of about 3% each year until the day you die at the age of 100.
What do you think? Do you agree with the ratio as the author suggests?
