Most advisors use financial ratios to grade the companies they buy and sell, but they don’t always scrutinize their clients’ finances with equal rigour.

Charles Farrell, an advisor in Medina, Ohio, suggests clients need to learn how to measure themselves against key ratios if they want to avoid problems down the road.

Writing in The Journal of Financial Planning, Farrell says it’s crucial that advisors help clients understand how their income, savings and debt are related, and how the ratios must change sharply over time if their retirement is going to play out according to plan.

Farrell says financially healthy families and individuals may look quite different at different ages, so it’s important to review key ratios such as savings to income, debt to income and savings rate to income.

Looking to replace 60% of a family’s pre-retirement income at age 65, Farrell suggests that everyone, at every age, should save 12% of their income annually. In his calculations, the figure doesn’t change, but the amount of savings accumulated relative to household income clearly does. He expects 30-year-olds to have 10% of their income amassed in savings, including retirement plans. He says savings amassed at ages 40, 50 and 60 should be 1.7 times income, three times income, and 8.8 times income, respectively.

The ratios are based on the total household income, debt and savings rate, which means they can be used by a single head of the household or a married couple. For a couple, if only one spouse works, then the age of the working spouse is used for benchmarking. If both spouses work and there is less than a five-year age difference, then a simple averaging of their ages is used.

At age 30, you’ll have your highest levels of debt relative to your income, says Farrell. He pegs that number at about 1.7, meaning that if you’re earning $50,000 at age 30, you should be no more than $85,000 in debt. That’s nice in theory, but most people living in a major city would have to borrow much more to buy even a half-decent house.

According to Farrell, as people age they should reduce their debt/income ratio by paying down their mortgage and aggressively cutting auto and credit card debt. At age 45, debt should equal annual salary. By retirement at age 65, debt should be zero, and the nest egg should be equal to 12 times income.

Underpinning the ratios are three key assumptions, each of which seems tinged with shaky optimism.

First, Farrell assumes that retirement savings will earn at least five percentage points a year more than inflation. Over the past 50 years, however, as the U.S. economy grew 3.4% a year on average, the Standard & Poor’s 500 composite index has returned only 6.8% after dividends were reinvested. Consider that the U.S. Social Security Administration says that, after 2020, the U.S. economy will expand by less than 2% a year — the slowest sustained rate since the 1930s — as population growth eases. The forecast suggests a more conservative number might be called for when putting together a retirement plan.

Second, Farrell assumes investors will salt away about 12% of pre-tax income for retirement every year. Although the required annual savings would also be lower for those receiving a traditional company pension, it’s still an unrealistic number.

The average Canadian savings rate is hovering around zero — vs 4.2% between 1997 and 2003 and double-digit savings rates through most of the prior decades — so most folks aren’t saving anything like 12%. Nor, one suspects, are their advisors.

Finally, Farrell might be too generous with regard to retirement withdrawals. Most reliable studies suggest withdrawing just 4% of a portfolio’s value during the initial years of retirement, and thereafter stepping up annual withdrawals along with inflation. Farrell, however, assumes a 5% withdrawal rate throughout.

If you think the figures are slightly off base, then calculate your own numbers and help clients plot their path toward them. Just get started, advises Farrell, because when people measure how they’re doing now, they often find ways to improve things significantly. IE