It’s the question everyone wants to know about retirement, and it’s one of the hardest to answer: Am I on track?
Complex modeling software can forecast whether your portfolio will grow enough to cover future expenses, but it relies on so many variables that it often fails to resonate.
Ordinary net-worth statements carry a lot of non-retirement assets that can cloud the picture. And they don’t account for whether or not we are good savers or have appropriate insurance, what we expect from Social Security or how much volatility is in our portfolios and income.
To make your own balance sheet for retirement, head for the computer. Start with the same structure as a personal net worth statement: Assets minus liabilities equal net worth.
Now click on a spreadsheet or grab a pencil and draw two columns:
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Adding up retirement
ASSETS
1) Long-term accounts: 401(k) plans, IRAs, long-term taxable savings (Don’t count funds you’re likely to spend before retirement.)
2) Personal properties–market value of homes, vacation homes, etc. (Plan to stay in your home forever? Consider removing home values or list only up to a home equity credit line or reverse mortgage amount, less mortgages.)
3) Life insurance cash value (accumulated in permanent policies, not term)
4) 529 plans that could be tapped for retirement if they had to be (You may choose to leave this off the table.)
Add lines 1-4 …………… A
5) Current savings rate as percentage of gross income
6) Social Security and pensions, projected annual benefit
7) Life policy face value
8) Disability policy (percentage of pay)
9) Retiree health benefits (yes/no)
Line 5. Next to the savings rate, write a 10 if the rate is 15 percent or higher; 5 if it’s 10 percent to 14 percent; 0 if it’s less than 10 percent.
Line 6. Write a 10 if these cover 60 percent or more of your projected retirement living expenses; a 5 for 40 percent to 59 percent; 0 for less.
Line 7. Assign an 8 if the face value of the policy is 10 times the income of the insured (assumes a couple); a 4 if it’s 5 to 9 times salary; a 2 if less.
Line 8. Assign a 7 if it covers at least 60 percent of pay until retirement age 5 if it covers 40 percent to 59 percent; 0 if you don’t have a policy.
Line 9. Mark a 2 if your company offers them and a 0 if not.
C ……………
LIABILITIES
1) Properties (remaining mortgage plus alternative housing in retirement)
2) Estimate of any other retirement debt
Add lines 1 and 2 …………… B
A-B = NET WORTH
The younger you are, the more likely this number is negative. The closer you are to retirement, the closer it should be to an amount you can live on for the rest of your life.
3) Living expenses
4) Portfolio risk (low, medium, high)
5) Job risk (low, medium, high)
D ……………
Line 3. Give yourself a 20 if your projected retirement living expenses are less than your Social Security and a guaranteed pension; a 10 if they’re less than Social Security plus pensions and a 4 percent withdrawal rate from investments; otherwise, zero.
Lines 4 and 5. No scores
C+D = RETIREMENT SCORE
This non-scientific measure of how you’re doing in certain categories, along with their relative importance, is based on interviews with financial advisers and academics. Generally, the higher your number is, the better. However, some categories will naturally change as you age.
J. MYSTKOWSKI/TRIBUNE NEWSPAPERS
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Next week: Experts dig into the details behind the score card.
Have a retirement question? Write to yourmoney@tribune.com, or via mail at Your Money, Chicago Tribune, Room 400, 435 N. Michigan Ave., Chicago, IL 60611. If your letter is selected, we may include you and your question in a future column.
