Your Savings Rate (during your accumulation years):

This calculation can be simpler than many suspect. Instead of going through the details of your annual income and hundreds of expense outflows each year, simply tally up how much is going into retirement accounts and determine whether savings balances have grown from the prior year. (The only thing that matters is new money you are adding to your net worth.) Take those two dollar amounts and add them together. Divide that total savings amount by gross salary. This is your savings rate. During your accumulation years that target is for 10% or more. If started early, at 10% or more, there is a good chance retirement will be truly successful.

Your Marginal Tax Rate:

This is the amount of federal tax you owe on one more dollar of earnings in a given year. This is important to know if you make discretionary financial decisions with tax consequence. Federal tax rates are as high as 37% in 2021. Pulling money out of an IRA, for example, might force you into a higher marginal tax rate. Also, holding off on selling an asset – deferring a capital gain into the next year might keep you at a reasonable tax rate this year. Borrowing funds, instead of selling, in an era of 4% interest rates, is also be a good option to keep you in a lower marginal tax rate. Four percent is significantly lower than 37%.

Emergency Fund/financial liquidity:

Even in an era of low interest rates, it is important to have a cash liquid reserve for emergencies. The rule of thumb in the planning profession is four to six months of living expenses in savings/checking. Borrowing on a high interest rate credit card is not a good source of funds for an unexpected auto or home expense or a loss of income. Having cash available eliminates the need for borrowing.

Your Withdrawal Rate (During Your Drawdown Years):

This is the rate at which you are drawing from your accumulated investment funds when you no longer have earned income. Advisor William Bengen in 1994 provided research showing that with a blended mixture of stocks and bonds, accumulated retirement funds have a high probability of lasting a lifetime if withdrawals are capped at 4% of principal. This allows for inflation and periodic extreme market volatility. In recent years, he and others have increased the draw rate to 4.5%, suggesting the probability of success remains high at that level. It is clear from research that excessive draws well above that level have a high probability of depleting retirement funds.

Your Net Worth:

Your net worth is your level of accumulated assets designed to replace your working income. Net worth is simply calculated by totaling up your assets and subtracting your liabilities. Some suggest excluding your primary residence because it is not a source of income (and if you borrow against it, this decreases your net worth by the cost of the liabilities.) How much net worth you need for lifetime financial success is dependent on many factors – primarily what sources of income you have in retirement from pensions and social security or part-time wage income. Running a long-term analysis can help determine if your net worth is sufficient to last a lifetime. Some advisory firms refer to this as Monte Carlo analysis.

Your Investment Score:

There are many investment questionnaires available online and through financial advisory firms. These can be helpful to determine your investment temperament and recommended allocation based on your unique goals. Our personal preference is for questionnaires that blend many factors together that include age, income, financial goals, liquidity, psychological measurements and past investment history. The questionnaire results should be easy to interpret. Your score should help you identify an allocation strategy appropriate for your needs.