Soaring Housing Costs
Jeopardize Retirements

Take a deep breath -- and then look at the accompanying table.

There, you will find savings and debt guidelines put together by Charles Farrell, a financial consultant in Medina, Ohio. These guidelines will, I suspect, generate howls of outrage. But I think the table offers a much-needed reality check, especially for folks who are piling on the mortgage debt so they can play in today's overheated housing market.

The numbers tell you how much retirement savings and how much debt you should have, relative to your income, at different ages. Suppose you are 45 years old and hauling in $70,000 in annual income.

According to the table, you ought to have $210,000 saved for retirement and just $70,000 of debt. Are you hitting these targets? Probably not. Should you strive to catch up? You'd better believe it.

Taking aim

"I use the table with clients to see if they're behind the eight ball," explains Mr. Farrell, who specializes in advising individuals and corporations on retirement issues. "Are people a bit surprised by the ratios? Yeah, they're surprised. It can be a tough pill to swallow."

For instance, if you are 30, the table recommends limiting your total debt, including mortgage debt, to 1.7 times income. That is a lofty goal, especially if you live in a major city on the East or West coast, where most people have to borrow heavily to buy even a half-decent house.

Similarly, if you are 65 and about to quit the work force, the table indicates your nest egg should be equal to 12 times income. To many people, that will seem like an impossibly large sum.

But before you dismiss the table's targets as absurdly draconian, I have bad news. If anything, the targets aren't stringent enough. The reason: Underpinning the ratios are three key assumptions -- and all three may be a tad optimistic.

First, Mr. Farrell assumes your retirement savings will earn roughly five percentage points a year more than inflation. You may have a tough time notching that sort of return, given today's rich stock-market valuations, skimpy bond yields and the drag from investment costs.

Second, Mr. Farrell assumes you will sock away about 12% of your pretax income for retirement every year from age 30 to 65. If your employer contributes 3% of your salary to your 401(k) plan, that would reduce your share to 9%. Your required annual savings would also be lower if you expect to receive a traditional company pension.

Still, let's be realistic: With the official savings rate hovering at about 1%, most folks -- even with their employer's help -- aren't saving anything like 12%.

Finally, Mr. Farrell may also be a little too generous when it comes to retirement withdrawals. Today, many financial experts advise retirees to withdraw just 4% or 4.5% of their portfolio's value during the first year of retirement and thereafter to step up their annual withdrawals along with inflation. Mr. Farrell, however, assumes a 5% withdrawal rate.

Suppose you and your spouse earned $80,000 in your final working year and retire with 12 times that sum, or $960,000. A 5% withdrawal rate would give you $48,000 in the first year of retirement, or 60% of your preretirement income. "Throw on some Social Security, and the typical retiree would be up around 80%" of his or her preretirement income, Mr. Farrell figures.

Catching up

Wouldn't mind having that sort of retirement income? My advice: Stick close to the table's targets -- or you could find yourself in a heap of trouble.

Let's say you are 40 and your family income is $100,000. The table says you should have $125,000 in debt and $180,000 of retirement savings. But instead, enamored by today's highflying real-estate market, you have plunked for the big house, leaving you with a whopping $300,000 of mortgage debt and just $50,000 in retirement savings.

Suddenly, the math gets really ugly. To get back on track, so you can retire with a portfolio big enough to generate 60% of your preretirement income, Mr. Farrell figures you would need to sock away 20% of your pretax income every year for the next 25 or 26 years. Hitting that savings target would be all but impossible, because mortgage payments and taxes would likely consume more than 40% of your income.

"There is a fundamental relationship between what you earn, how much debt you have and what you can afford to save," Mr. Farrell says. "If you're servicing too much debt, you can't hit your savings target."

Real-estate junkies would no doubt respond that, come 65, they can cash out some of their home equity and retire in style. That strikes me as a dubious strategy, for two reasons.

First, it assumes that today's highflying real-estate market will keep on soaring. Second, even if home prices hold up, these folks have severely crimped their ability to save, because real estate is devouring so much of their annual income. After all, the big house means not only big mortgage payments, but also hefty maintenance expenses, property taxes, utility bills and homeowner's insurance.

Got far more debt than the table suggests -- and far less savings? There are ways to straighten out the mess, but the choices aren't pleasant.

"Maybe you should trade down earlier," Mr. Farrell says. "Maybe you need to delay retirement. Maybe you should talk to the kids about taking out loans for college. Maybe, if one spouse doesn't work, it's time to get a part-time job and then sock away all of that extra income."

Email your comments to rjeditor@dowjones.com.