• Dave Anthony, CFP

The #1 Thing To Know Before You Retire

How to determine if you are ready to retire or not in one simple number

How do you know if you can retire? How can you tell if you've saved enough and can truthfully answer the question, will I run out of money in retirement?

The answer to these questions can be found in the “Swiss army knife”  of all retirement planning readiness gauges, THE FUNDED RATIO.

Simply put, your funded ratio is the present value of everything that you own divided by the present value of everything that you owe. Present value is key here, you are adding up the current value of all of your investment accounts and the all of your future income streams that you are expected to have (Social security, pension payments, other guaranteed payments) throughout your life and comparing those to the present value of all of your future expenses/liabilities (income taxes, health care costs, etc.).

The resulting number will give you a good idea if you can retire. This is the math behind the "fundedness" of your retirement.

For example, let’s take a baby boomer couple ages 65 and 62 with an investment portfolio of $1.3 million dollars, a house worth $600k, and future lifetime Social Security and pension payments of $1.8 million.The present value of these assets is $3.7 million. The only debt the couple has is their $200k mortgage, but the present value of all of their future income tax and medical care costs for the next 30 plus years is $2.6 million. The present value of all of their future discretionary and non discretionary expenses for the next 30 years is $1.4 million. Adding those together gives us the present value of all of their future liabilities in today’s dollars,  $4 million.

Their Funded Ratio is: Present Value of assets: $3.7 million / Present value of liabilities $4 million = .93

They are 93% “fully funded” for their retirement. Definitely not as good as you would like it to be, especially for someone with no debt (except for the mortgage) and $1.3 million in the bank.

The greater the number the better. By doing proper tax planning and investment management, you can make that ratio even higher.

Do yourself a favor, calculate your Funded Ratio today, and get a good mathematical idea of where you stand!

If you'd like our help, contact us today.

At Anthony Capital, we offer comprehensive, integrated financial planning and wealth management services.

Our clients benefit from the combination of our mathematically-based investment management strategies and the application of time-tested financial planning principles.

Blending sound money management techniques with intelligent tax, estate, and insurance planning, creates truly unique financial planning outcomes for our clients. 

(This article by Anthony Capital's David M. Anthony, CFP®, RMA was featured on BrightScope)