The Best Time to Start a Financial Plan is Now
by Tricia Bush, CPA, CFP® Owner, AAA Advisory LLC
Know Your numbers
Your Financial Checkup for Retirement
When was the last time you had bloodwork done?
Most of us don’t wait until we feel terrible to see a doctor. We have routine checkups, check our blood pressure and cholesterol, and occasionally get bloodwork to see what’s going on beneath the surface. Our finances deserve the same attention.
One of the biggest sources of anxiety I see around retirement is simply not knowing the numbers. People ask, “Do I have enough?” or “Can I afford to retire?” But without knowing a few key numbers, it’s difficult to answer those questions, and uncertainty can create a lot of unnecessary fear.
Whether you’re 35 and building wealth, 55 and wondering when you can retire, or already retired, knowing your numbers can give you something much more valuable than a perfectly designed spreadsheet: Confidence.
Here are six numbers worth knowing.
1. Your Net Worth
Start with the big picture. Add up what you own, retirement accounts, investment accounts, cash, real estate, and other significant assets. Then subtract what you owe.
That’s your net worth.
If you’re still working, look at how that number is changing over time. Is it generally moving in the right direction?
As retirement gets closer, take a closer look at what makes up your net worth. Having $1 million in assets sounds great, but $1 million in home equity is very different from $1 million in investments that can provide retirement income.
2. Your Savings Rate
If you’re still accumulating wealth, this may be your most important number.
How much of your income are you actually saving for the future?
A common rule of thumb is to work toward saving about 15 percent of your gross income each year for retirement, including employer contributions. Your personal target may need to be higher or lower depending on when you started saving, when you want to retire, and how much you expect to spend.
This is why the standard 3 percent automatic 401(K) enrollment rate shouldn’t be confused with “enough.” It’s a great starting point, but for most people, 3 percent alone is unlikely to build enough retirement savings.
If you’re currently saving 3 percent, don’t be discouraged. The goal isn’t to jump from 3 percent to 15 percent overnight. Try increasing your contribution by 1 percent when you get a raise, bonus, or promotion. Small increases can add up significantly over a career.
3. Your Annual Spending
As retirement approaches, the focus begins to shift. Instead of asking, “How much do I make?” start asking, “How much does it cost me to live the life I want?”
Your retirement portfolio isn’t trying to replace your salary. It’s trying to fund your lifestyle.
Knowing your annual spending, and separating essential expenses from discretionary spending, gives you a much clearer retirement target.
4. Your Expected Retirement Income
Next, estimate the income you can reasonably expect once you stop working.
This could include Social Security, a pension, rental income, an annuity, or other predictable sources of income. Then compare that income with your expected spending.
If you expect to spend $90,000 per year and have $55,000 of reliable income, your investments need to provide the remaining $35,000.
That’s a much more useful question than simply asking, “Do I have enough saved?” Now you know what job your portfolio needs to do.
5. Your Tax Picture
Taxes don’t stop when you retire. In fact, retirement can create an entirely different tax picture.
Know where your money is located: traditional retirement accounts, Roth accounts, and taxable investments. Understand your current tax bracket and how future withdrawals, Social Security, and required minimum distributions could affect your taxable income.
Two people could have identical $1 million portfolios and very different after-tax spending power, depending on how that money is structured.
6. Your “What If?” Number
Finally, don’t just ask, “What happens if everything goes according to plan?”
Ask what happens if it doesn’t.
What if you retire two years earlier? What if the market drops shortly after you retire? What if you live into your 90s? What if you spend more than expected?
You don’t need to predict the future. You want to know whether your plan is resilient enough to handle some changes.
Start with your numbers. You don’t have to be a financial expert to do this. And you don’t need an elaborate financial plan to get started.
At a minimum, you should be able to answer:
What do I have?
What do I owe?
What am I saving?
What do I spend?
What income will I have in retirement?
And how well does my plan hold up if things don’t go exactly as expected?
Think of these as your financial bloodwork.
You may discover that everything looks healthy. You may find an area that needs attention. Or you may realize you need a more thorough checkup. The important thing is that you won’t be guessing anymore.
And sometimes, simply knowing your numbers is the first step toward feeling a whole lot more confident about your financial future.
Disclosure: This article is for educational purposes only and is not intended as financial or tax advice. Every financial situation is unique, and you should consult with a qualified professional before making decisions regarding your specific circumstances.
