Category: Everyday Finance

Use Net Worth To Track Retirement Readiness

Planning for retirement can be hard.

Imagine all the variables that have to be taken into account. The number of working years remaining. How long retirement will last. What income will be needed to live on. It’s easy to get overwhelmed in all the details and quit before even getting started.

But without a plan in place, it’s impossible to answer the question, “am I on track for retirement?”.

Follow the steps in this post to develop a simple retirement plan that you can easily track year after year — without having to think too hard about the details.

Where You Are At

The first step to establishing a plan is determining your current financial situation with a personal net worth statement.

The combination of what you own (your assets) and what you owe (your liabilities) makes up your personal net worth.

You can access a template net worth statement below.

personal net worth statementDownload

You’ll probably notice that I distinctly separate “liquid” assets from “hard” assets. That’s because, in my opinion, liquid assets offer a more accurate representation of what can truly be used to fund retirement needs.

For example, a majority of people stay in their primary residence throughout retirement. Only selling it if absolutely necessary. Likewise, personal belongings and collectibles will most likely be handed down to family members.

For these reasons, I prefer calculating a person’s liquid net worth and using it as a reference point for measuring progress toward their goals.

Where You Want To Go

Now that you have the starting point, it’s time to think to the future. 

What do you want your retirement to look like? How much annual income do you think you’ll need to fulfill your lifestyle of choice?

This number will be your Target Annual Retirement Income. 

Next, you’ll need to determine how long your retirement might last. Given today’s medical advances, somewhere in the realm of 25 to 30 years isn’t out of the question. 

Multiply your Target Annual Retirement Income by the number of years you expect to be retired. You’ll end up with an amount that would be needed today in order to accomplish your chosen lifestyle.

Adjust For Inflation

However, $750,000 today isn’t equivalent to $750,000 at retirement thanks to our dear friend inflation. 

The next step is to adjust the needed amount for inflation in order to determine how much you’ll actually need to accumulate by retirement. 

You can quickly calculate this using an inflation calculator. When using the calculator, you’ll need to have these three inputs handy:

  • present value = what’s needed
  • years from now = number of working years remaining
  • inflation rate = expected annual inflation (let’s assume 3.5%)

As we can see, $750,000 today is equal to nearly $1.8 million in 25 years if inflation averages 3.5%.

Tracking Liquid Net Worth

You have the starting point (current liquid net worth) and your inflation-adjusted goal (where you want your liquid net worth to be at retirement), now it’s time to use a graph to plot each point.

This goal line will give you a path to follow and help you know if you’re staying on track with your accumulation goal.

An easy way to track your progress is to, at the beginning of each year, log your liquid net worth — in a notebook, spreadsheet, or web app — and create a goal for where you want to be the following year. 

As you can imagine, your net worth won’t follow a straight line. It will vary from your intended goal line as life ultimately happens. However, a variance of 20% to either side of your goal is still in a healthy range.

Make note of the significant events that contributed to changes in your liquid net worth (like increased savings, paid down debt, markets up and down, etc.) and adjust your savings accordingly.

Develop Your Plan

I’ve given you some tools and enough guidance to get you started on your path to retirement readiness, but nothing beats working with a financial professional who can help navigate the many potential road bumps you face along the way.

Don’t hesitate to reach out to me for guidance on retirement readiness, or anything else I write about. I’m happy to help!

Where Did All My Money Go?

It’s Thursday after work and your friend sends a text about going to Margarita Night at the local Mexican restaurant. You decide you want to unwind with some tasty arroz con pollo and a refreshing margarita or two, so you reply, “sure”. You pull up your bank’s app to check your account balance — $106.26. “Where did all my money go?!” you think to yourself.

According to a Gallup poll from 2013, only about one in three Americans actually has a household budget. I would say this statistic is still accurate because less than half of the people that come to me for help actually keep track of their cash flow. When I ask those who don’t, why they don’t, the standard response is, “I look at my online banking every day so I know how much I have to spend”.

This is partially true. Your online banking application does tell you how much you have available to spend right now (according to their records) but it doesn’t tell how you are spending your money. If you want to get a better grasp of where your money is actually going, you’re going to need to actively keep track of it.

Reasons To Track Your Expenditures.

Banks make mistakes. I worked at a bank and I saw this first hand. While it isn’t a common occurrence, it still happens. It may not even be the bank’s fault. It could be a merchant that double charged you by mistake.

Some merchants charge more or less than the actual transaction. A prime example of this is gas stations and hotels. When you select debit/credit at the pump, the gas stations will put a temporary $1 pre-authorization charge on your account. This way the vendor can verify the card is active before authorizing the total amount. So you really put $20 in your tank, but your pending transaction on your online banking will say $1. After the transaction is authorized the $1 will fall off, but that could be minutes to hours after you actually filled up. A lot can happen in a few hours.

Fraud. A thief gets a hold of your card number and proceeds with a spending spree. A lot of times a thief will charge a few small items first. If they get away with it, they go for the big time items hoping that you don’t catch it until they are scot-free.

Paper checks. Paper checks may not be used very often anymore, but we still use them occasionally. Like that $20 check you wrote to your niece six months ago for her birthday that she still hasn’t cashed.  Those checks can add up and one day you may find your checking account overdrawn because your niece finally got around to cashing that check.

It will help you budget. The dreaded “B” word. I find knowing where your money is going is integral to formulating a budget. If you know that you spend $200 a month at Starbucks, you have a benchmark for how much you want to cut and spend somewhere else.

How To Keep Track Expenses.

There are multiple ways to keep track of cash flow; all the way from the basic check register to apps on your phone.

Doing it the old fashioned way of balancing your checkbook takes a little more time and effort. You will need to keep the receipts from any transactions you use your card for and write them down in a check register. If there are any outstanding checks or pending transactions, they won’t be checked off until they actually post to your account, but they still should be subtracted from the running total.

Apps like Mint, GoodBudget, or You Need A Budget are great for people who want to base their budget on their cash flow. The apps link to your checking account and help keep track of your spending by category. You will get reports on where your money was spent and how much you have left for the month based on the budget you created. They even give you reminders of when reoccurring bills are due.

Stay On Budget.

Keeping track of your cash flow is an important step in helping you create, and stay on, a budget. When you know where your money is going, it is easier to ensure you have enough money for the things you need. It’ll also help you pay off any debts you have and keep you out of debt going forward.

Living on a budget doesn’t mean giving up things you want or like. You can enjoy the occasional iced latte and still find places to cut back in order to balance your income and expenses.