Wednesday, April 30, 2025

With tax time passing, it may be time for some to evaluate their finances. Like many people, I am interested in retirement, and what my finances will look like when I retire. Or, put another way, when my finances will allow me to retire. I've done a fair bit of study on the subject, reading books such as The Wealthy Barber, The Millionaire Next Door, and Rich Dad, Poor Dad, among other publications on debt, saving, and investing.

One common theme, especially for those without huge incomes, is to consistently save. A common figure for saving is 10%, although The Millionaire Next Door is a bit more aggressive. The idea is that if you save 10% of your earnings over the course of your working years, investing fairly conservatively, you will end up with enough for a comfortable retirement. It's a good idea, but requires some adaptation for practical application.

There are some difficult questions for someone trying to adopt the 10% rule. For instance, if you've already worked for 10 years, how are you supposed to know how much you should already have saved? If your house increases in value, how should that be counted? Is the 10% supposed to be invested in cash, or are non-financial assets OK too?

Some books attempt to address such questions with simple formulas for the amount you should have saved based on your age and income level. Such calculations do not take into account your employment history, so the result is often disappointing. The only way to properly figure it out is to account for relevant work history, including breaks for career-related education. That may sound difficult, but it is actually quite easy given the proper tools.

Using the concepts from various publications, I've created a simple spreadsheet that helps plan how much you should have already saved, based on a saving percentage, as well as figure out how much you will have saved by retirement if you employ a percentage saving plan. The forecasts are only estimates, but they are helpful in figuring out how much you should save in order to reach a certain retirement goal. I've included some nifty features, such as the ability to account for inflation, change the saving %, change the retirement age, and track actual savings versus suggested savings.  All the computations are automatic - you just fill in a couple fields such as starting salary, and the personalized forecasts instantly appear.

Forecasts and goals are great, but how do you measure your progress in the real world? That can be a bit more complicated, but well worth the effort. The main idea is that you should measure your Net Worth when evaluating your financial position. Your Net Worth is the total, single amount that best represents your financial condition - the total of all your assets (cash, investments and saleable possessions) and liabilities (mortgage, credit cards, personal loans, etc.). Some people use only their cash savings and investments when planning for retirement, but responsible planning includes everything - including debt. Especially debt. If you already have a method for figuring out your Net Worth, great. If not, contact me for a copy of my "Master Financial" worksheet, which includes a very accurate Net Worth page.

With accurate, personalized planning tools - primarily spreadsheets - you can achieve a high level of knowledge about your own personal finances. Future financial performance is never guaranteed, but when you know where you stand, and you plan for the future, you greatly improve your financial awareness and the likelihood that you will retire in comfort and security.

One last note regarding percentage savings plans such as "The 10% Solution" - perhaps the easiest way to do this is to take the top 10% off your paycheck. Either a 401K, which uses pre-tax dollars, or an IRA using payroll deduction can make saving 10% a snap. With that done, you'll be better set for retirement while hardly noticing any difference in your monthly spending money.

Happy planning.

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