Are You on the Right Path to Retirement? Assessing Your Asset-Income Multiple

Maybe you’ve been working hard and saving money for your entire career. Maybe, in fact, you’ve been saving more each year as your income has increased, based on reading online articles that give general rules of thumb. Or maybe you’re a little behind. Either way, there are a lot of opinions out there, and it’s confusing. How do you know if you’re saving enough to reach financial freedom? How do you know if you have accumulated enough assets to support you in retirement? 

There’s actually a simple calculation that can give you a rough idea very quickly. It’s called the Asset-Income Multiple, and it measures the amount of assets you’ve accumulated up to this point in relation to your current income. As you might guess, the bigger the number, the better. Using some incredibly useful research by Marlena Lee and Massi De Santis of Dimensional Fund Advisors, you can look up your Asset-Income Multiple in the table below to see if you’re on track. 

How Do You Determine the Asset-Income Multiple? 

To calculate the Asset-Income Multiple, first add up the value of all your investment assets, including bank savings accounts, brokerage accounts, retirement accounts, and any other accounts that you will use to live on in retirement. Don’t include your home equity (the value of your home minus outstanding loan balance) unless you plan to sell your home and use the proceeds to live on in retirement. Once you’ve added up all your investment and retirement accounts, subtract any debt, such as car loans, credit card debt, and student loans. The total of your investment assets minus debt is your accumulated assets. 

Now, divide your accumulated assets by your total household annual gross income. Gross annual income is the amount you earn in a full year before taxes, retirement contributions, or other deductions. It appears as the top line on your paystub before any withholdings are applied. The result of this calculation is your Asset-Income Multiple. 

Compare your Asset-Income Multiple to the values in the table below using the column closest to your age, or estimate a value between two ages if needed. For example, if you are 45 years old, your Asset-Income Multiple of about 3.75 aligns with this particular research-based framework, while a multiple closer to 5.25 reflects a larger margin relative to the assumptions used. These figures are illustrative only and are not determinations of retirement readiness or future outcomes. 

To view this another way, if your household income at age 45 is $300,000 and your Asset-Income Multiple is 3.75, this would correspond to approximately $1,125,000 in accumulated assets at this stage under this framework.  

On-Track Asset-Income Multiples

These results reflect a particular savings strategy described by Lee and De Santis that recommends an increasing savings rate as your income increases throughout your career.  For example, for income in the range of $100,000 to $130,000 per year, the research incorporates an assumed savings rate of about 18% per year within its modeling framework. However, once your income increases beyond $180,000 per year, their research reflects a higher assumed savings rate of about 26% based on its underlying assumptions. 

There are plenty of other assumptions that go into the research behind the table, including: 

• You retire at age 65. 

• Your income follows a certain trajectory, rising early and peaking around age 50. 

• You replace 40% of your preretirement income through savings, Social Security, and reduced expenses and taxes in retirement. 

• Your investment portfolio gradually shifts from all equities early in your career to a mix of stocks and bonds over time. 

• You don’t receive pension income beyond Social Security. 

These assumptions don’t apply to everyone, and circumstances may differ. But the Asset-Income Multiple can give you a rough idea of where you stand. In broad terms, at age 35, accumulated assets equal to your annual household income reflect early progress. At age 45, assets around four times income fall within the modeled ranges, while higher multiples represent greater asset accumulation relative to income. If your savings fall below these general benchmarks, it may be worth increasing annual contributions to close the gap. 

The Asset-Income Multiple serves as one high-level indicator of your financial health. To determine more precisely whether you’re on the right path to retirement or financial freedom, a comprehensive financial plan can provide additional clarity. Monte Carlo analysis, a commonly used retirement planning tool, can evaluate a range of possible market outcomes to model potential long-term results based on a set of assumptions.  

Savant Wealth Management provides holistic wealth management services including financial planning, equity compensation planning, investment management, tax planning, and others, on a fee-only basis and as a fiduciary, acting in clients’ best interests. If you’d like to know whether you’re on the right path to retirement or financial freedom, schedule a complimentary consultation. 

This is intended for informational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment professional regarding your unique situation. 

Bruce R. Barton Managing Partner / Financial Advisor CFP®, CFA®, MBA

Bruce is a CERTIFIED FINANCIAL PLANNER® professional and Chartered Financial Analyst® (CFA®). He works with clients in the technology, biotech, and biomedical industries, drawing on his background in engineering and product management.