Planning for retirement can be hard.
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But without a plan in place
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.
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!