When It Comes to Destinations, Pay Attention to the Financial Markers


Key Takeaway: We have destinations like retirement that we need to prepare for financially. Using financial markers along the way can help us stay on course.

Typically new clients come to me because they are thinking about major milestones in life, like retirement or their first child. Those milestones are the destination, and it is my job to help them get to their destination. However, because a destination can be years or even decades in the future, it may feel unreal and it is easy to get sidetracked by more immediate pursuits. That is why I like to use financial markers. Like mile markers along the road, financial markers help keep clients on track.

Financial ratios actually make for great markers, and Charles Farrell, a financial planner in Ohio, has developed a personal take on ratios. Just as you might look at a stock’s price to earnings (or P/E) to assess a company’s financial health, Farrell has developed the S/E (savings to earnings), D/E (debt to earnings), and SR/E (savings rate to earnings) to help people evaluate their personal financial health.

Play around with these kinds of statistics, and you might be surprised by the results. For instance, suppose a young professional couple had a D/E ratio that showed their debt was running twice as high as their income. Now, I rarely recommend that anyone carry high amounts of debt, but younger couples have the time to work off their debt. However, a retired couple’s D/E should have a different number. And although everyone is unique, most retirees should aim for no debt.

So if a retired couple’s D/E is the same as that young couple’s, then they should probably rethink their financial plan. This may seem obvious, but I have talked to many retiring or retired couples over the years who have debt levels that are four or five times their income—plus they are carrying a huge mortgage! In the example above, the retired couple should pay careful attention to their D/E because it is a marker illustrating that they have veered off-course from their destination of a financially sound retirement.

One last note: Farrell offered guidelines for the S/E ratio that people at different ages ideally should have. For a 35-year-old, Farrell believed the S/E ratio should be .9. At 45, it should be 3.0; at 55, 6.5; and at 65, 12.0. A careful examination of these numbers shows that we should save at least 12% of our income each year, and possibly higher than 20% for some, to attain a more comfortable retirement. This is a financial marker we can use on our road to retirement.

Statistics like these may lead to drastic behavior modifications, and obviously the ratios won’t apply to everyone because everyone’s situation is unique. But I bring them up to illustrate the importance of financial markers. So ask yourself: Are you navigating by the financial markers that point the way to your destination? If not, it may be time to change your behavior to get back on track.

The opinion of the author is subject to change without notice and must be considered in conjunction with relevant regulation, as well as subsequent changes in the marketplace. Any information from outside resources has been deemed to be reliable but has not necessarily been verified. Each individual has unique circumstances to which this information may or may not be relevant. Under no circumstances will this information constitute an offer to buy or sell and it does not indicate strategy suitability for any particular investor.