Evaluating how well you are doing in preparing for retirement is a major challenge. Is there a way to monitor your progress? Is there a tool to help you see where you should be as you work toward retirement?

One method of monitoring your progress is to review your progress every year using Learning Tool 6: Retirement Planning Needs Worksheet. This method is useful, but keep in mind that it does not account for large-ticket expenses, such as a home; also, it does not allow you to see where you should be in the retirement planning process based on the factor of age. In addition to these disadvantages, this Learning Tool does not allow you to see the impact that changes in interest rates can have on your available savings at retirement.

On March 25, 2005, an article by Jonathan Clements entitled “Ugly Math: How Soaring Housing Costs Are Jeopardizing Retirement Savings” (p. D1) appeared in the Wall Street Journal. This article proposes an interesting idea. Using guidelines put together by Charles Farrell, Clements proposes that individuals and families can determine how close they are to achieving their retirement goals by looking at three specific factors: 1) the amount saved in their taxable and retirement vehicles, 2) the amount of their overall debt, and 3) the amount of their annual earnings. By looking at the ratios of year-end savings-to-annual income and year-end debt-to-annual income, you can see whether or not you are on track to achieve your retirement goals based on a table shown in Clements’s article (see Table 1).

 Table 1

Age	Savings-to-Income	Debt-to-Income
30	0.1	1.70
35	0.9	1.50
40	1.8	1.25
45	3.0	1.00
50	4.5	0.75
55	6.5	0.50
60	8.9	0.20
65	12.0	0.00

 These guidelines are a reality check for today’s spending frenzy, because they show the relationship between savings and debt, and show you that you must manage both variables—not just one. The article also encourages you to reduce debt while at the same time increasing savings. Clements’ article has three main assumptions. They are:

1. Investors will earn 5 percent more than inflation. While I think this assumption is reasonable, 5 percent might be on the high side for older investors who are primarily invested in fixed-income assets.
2. Investors ages thirty to sixty-five will save about 12 percent of their pre-tax income every year. Currently, the average individual in the United States is saving significantly less than this amount, saving between 0 and 8 percent (some are even negative). Individuals need to increase the amount they save.
3. Investors will withdraw 5 percent of their portfolio’s value each year. This is probably an acceptable assumption.

While these assumptions are fairly reasonable, the information proposed in Table 26.1 is likely too soft. Both Clements and Farrell state that this information should probably be made more stringent. Overall, this is a great article and a good resource to help you understand where you are and where you want to be in terms of retirement planning.

Are there tools that can help you figure out where you are now and where you want to be as you work toward retirement? One suggestion is Learning Tool 25: Retirement Planning Forecasts Ratio. In this spreadsheet, I took the framework proposed by Jonathan Clements and Charles Farrell and developed a chart in which you can plan and chart your progress. This chart assumes basic information that can be changed depending on your current situation and age. This chart can help reveal weaknesses in your current plan and help you monitor your progress. The major disadvantage of this spreadsheet is that it assumes earnings and other factors increase each year at a specific rate, and it is only as accurate as the respective inputs.

I make five assumptions in this spreadsheet:

1. Housing payments are expenses, and investors can handle housing payments in amounts up to the “back-end ratio” used by many banks: 36 percent of gross salary. Inputs include not only the interest rate and the number of years left on the loan, but annual property costs and insurance costs. If your housing costs are greater than 36 percent, you will get an error message telling you to reduce the cost of the mortgage.
2. Additional payments for housing expenses, such as prepayments, come out of money earmarked for savings. If you decide to prepay your housing loan, the money that you have put in savings is diverted to pay off your mortgage. There is a relationship between mortgage payments and savings. The more you pay in mortgage payments, the less you will be able save for your other goals.
3. Individual inputs are consistent and achievable. Any program is only as good as an individual’s forecasts. I encourage you to be conservative with your forecasts.
4. Tax savings on interest payments are considered part of expenses. While this spreadsheet accounts for tax rates in retirement, it does not account for a tax shield on interest payments before retirement.
5. The amount of retirement savings desired is a multiple of income. I have included an input for your estimated market interest rate at retirement. You may decide to purchase an annuity when you retire with your savings. This spreadsheet will estimate the amount of the annual payment you will receive during retirement based on that estimated market rate.

The benefit of this spreadsheet is that if used correctly, you can use inputs that accurately represent your current situation.