“It’s the little details that are vital. Little things make big things happen.”
– John Wooden
When you visit the doctor, what’s the first thing the nurse does?
Puts you on the scale, takes your pulse, measures your blood pressure.
These are known as ‘Vital Signs,’ and they measure them for a very simple reason…
They are super quick and easy ways to assess your health.
Not comprehensive, more like a snapshot. The doctor wants to know, ‘is the patient basically healthy? Or showing obvious signs of distress?’ They can then proceed accordingly.
Your vital signs give your doctor the right starting point. It’s no different, really, when it comes to your retirement. Knowing your Retirement Vital Signs—and how to measure them—can go a long way towards improving and maintaining your financial health in order to secure the carefree retirement that healthy finances provide.
Here’s how to calculate your 3 Retirement Vital Signs.
Retirement Vital Sign #1: Net Worth by Age and Income
The concept of your net worth is simple. Your assets minus your liabilities. The net total of everything you own.
Think of your net worth like your weight. Checking your weight is about as simple as it can get!
But ideal weight can vary radically from one person to another. You have to add additional factors—like a person’s height or metabolism—to make a quantitative judgement about what their ideal weight should be.
Same goes for net worth. Once you find out what yours is, you have to find out what it should be.
So, here is the formula to calculate what your net worth should be, right now:
Let’s use an example. Say Bob is 55 years old, and his gross total family income is $120K. Multiply Bob’s age times his income, divide the resulting number by ten, and you get…$660,000.
In this scenario, $660,000 is roughly where Bob’s net worth should be when preparing for retirement.
Does that sound like you? If so, congrats! That’s a sign of good financial health.
If that doesn’t sound like you, then you’re not alone. According to the Census Bureau, the average 55-year-old American has a net worth somewhere between $84K and $145K1. Way lower than it should be according to the Net Worth test!
What can you do to bring your number up?
Well, the measurement provides a valuable gauge of the two most important habits you need for achieving a carefree retirement…
Savings and growth.
In other words, have you consistently set aside part of your earnings for the future? And—have you succeeded in growing those savings over time?
Putting it very simply, are you having money automatically saved and invested each month?
Like your ideal weight, net worth reflects several factors in one simple measurement.
Of course, a major career change or a windfall such as an inheritance might skew your results, so make sure you’re adjusting for those big events.
Retirement Vital Sign #2: Amount of Money You’ll Need at Retirement
After measuring your height and weight, what usually comes next?
The blood pressure monitor.
This one can be kind of uncomfortable. The cuff around your arm squeezes and squeezes until you think your arm will go numb, then finally releases, measuring the resulting blood flow.
When planning for retirement, the question is not blood flow but cash flow. And again, this one can make people uncomfortable.
You need to realistically determine what your cash flow need is, then stress-test it, to make sure you can accomplish all of the goals you set out to do. Don’t be afraid of a little sticker shock. The point is to get a realistic idea of what retirement costs.
Here is another simple formula to determine how much you need to meet your retirement spending goals:
[(Estimated expenses) – (Pensions and Social Security Income)] x 25
Okay, I’ll walk you through this.
First, figure out how much you will need each year in retirement. Start with your current annual spending and work from there. Keep in mind that some expenses, like gas for commuting, will probably go down, while others, like healthcare, could increase dramatically.
Having trouble figuring out what your retirement budget might be?
For the sake of this example we will assume your annual expenses total to $80,000.
The next step is to subtract any Social Security and/or pension benefits you might receive. Let’s say this number is $30,000.
Take the difference, which is $50,000, and multiply by 25. That’s $1,250,000.
This number is a rough target for how much you will ultimately need to retire, assuming your retirement age is 65 and you live for an additional 30 years.
Run through the calculation a couple of times, using different annual spending numbers. If you’re ready to retire, but your estimated spending far exceeds your net worth, then you might have some more work to do.
Retirement Vital Sign #3: Hitting Your Retirement Savings Target
Now it’s time to bring it all together.
Nothing can replace digging in and creating a written financial plan when preparing for retirement. However, this Retirement Income Calculator from NerdWallet can help you determine if you’re headed in the right direction.
It quickly and easily paints a picture of your retirement portfolio, based on four figures:
- Pre-Tax Income
- The amount you’ve already saved
- The amount you’re adding to that each
Think of this part as taking your temperature. You want to be in the optimum range—not too high, but definitely not too low.
If you aren’t close to reaching your goals, you might need to cut back on some things now in order to save for the future.
If you’re hitting the max, it might be time to cool off and enjoy some of the wealth you’ve worked so hard to build.
BONUS: Create a Financial Fitness Plan
Like in health, maintenance is key to retirement planning. Once you’ve calculated your Retirement Vital Signs, the following steps can help ensure improvement and maintain optimal retirement readiness.
- Take Income Inventory
We touched on this in Vital Sign 2, but you want to make sure to incorporate any and all income streams available to you in retirement.
Add up the value of your 401(k)s, IRAs, rental properties or mutual funds…anything that will contribute to your income during retirement.
If you receive a pension, ask HR about running various retirement scenarios should changing interest rates impact your benefits.
Calculate your Social Security benefit and talk with an expert to make sure you are maximizing your benefit.
Thinking about all possible income streams will help focus your eye on the big picture and prevent harmful distractions.
- Hire a Professional
Preparing for retirement is no simple task. Unless you’re a professional, chances are you’re going to need some help along the way.
Calculating your Retirement Vital Signs serves as a kind of road map…but a professional can take your planning to the next level by helping you avoid costly pitfalls many would-be retirees—even those with strong Retirement Vital Signs—fall into.
Let’s continue the conversation together. Click here to schedule a free Confidence Booster Call.
- Make Adjustments
The flexibility to make necessary or beneficial changes to your plan is key to a successful retirement.
Too often workers and retirees alike find their financial health locked into limited or no flexibility, usually through poor planning. They’re stuck in a house that is a money-pit, or an expensive annuity with insufficient growth.
Whether you need to work more, spend less, invest, or save more aggressively, take control of your retirement portfolio so you can spend your golden years on what really matters…
Quality time with friends, family, and loved ones.
Think you’re off-track?
Don’t worry. You may have time to make the changes you need…that produces the results you want.
“Don’t simply retire from something; have something to retire to.”
– Harry Emerson Fosdick
Retirement planning can be overwhelming, no doubt.
Comparing yourself with the Joneses only makes it worse. We all have different retirement goals…and achieving them is a personal journey.
Focus on your own Retirement Vital Signs. Determine if you’re on track.
Make adjustments. Get the help you need.
Then you’ll be able to plan—and potentially build—the retirement of your dreams.
1United States Census Bureau. (2011). Wealth, Asset Ownership, & Debt of Households Detailed Tables. Retrieved from Table 1. Distribution of Net Worth, By Net Worth Quintiles and Selected Characteristics: https://www.census.gov/data/tables/2011/demo/wealth/wealth-asset-ownership.html
Are you Retirement Ready? Take the QUIZ here to find out. Byron W. Ellis, CFP®, CLU®, ChFC®, CRPC®, is a CERTIFIED FINANCIAL PLANNER™ professional and Managing Director United Capital Financial Advisers, LLC, a Financial Life Management firm. The information contained in this article is intended for information only is not a recommendation and should not be considered investment advice. Please contact your financial advisor with questions about your specific needs and circumstances.
© Byron Ellis