If your needs and wants are already well taken care of, you need only focus on maximizing returns and eliminating scams.
If you have doubts about the ability of your financial resources to meet your needs and wants for the rest of your life, read on.
Understand your financial situation
You can easily discover the financial status of any publicly traded company by viewing its balance sheet and income statement. A balance sheet shows assets, debt and net worth as of a particular date. An income statement reports flows of income, expenses and the net change to your net worth during a particular period. In a very simple format, you should have similar cognizance of your own situation.
To create your balance sheet, list the total balances from your bank, brokerage, and employer retirement statements. These are the “liquid” assets you can invest. Separately, list other substantial assets such as a home, car, collectibles and such. Estimate their value. The total of these estimates plus your liquid assets are your total assets. Now list all loan and credit card balances. Add these to get your total debt. Subtract total debt from total assets. The result is your net worth
Going forward, income and asset growth will add to your worth. Investment losses and expenses – including financial fees and debt costs – will take away from it.
Know the dollar figure you should aim for
As a minimum goal, you want your net worth to be a positive number when you pass after having paid for all of the things you need. A better goal: a positive net worth when you pass after having done all the things you want. Even better: do all those things and leave substantial net assets to others to help them achieve their goals and dreams.
Most of us face a life cycle with two adult financial phases: a period during which we earn money and add to our worth followed by retirement, a period in which we might find ourselves draining assets. There could be intermittent variations from that model, such as spans of unemployment or years in which big health or education expenses hit. But those financially rainy days are just bumpy parts of a road leading to the end of our working life. At some point, you will probably begin a long spell of reliance on non-wage income.
You may be able to keep wealth growing until your final days. If you are not yet in that position, if your anticipated expenses exceed your expected future income, before retirement your savings must get to a level adequate to meet your needs for the rest of your life.
What do you need?
To determine how much you need to invest, it is helpful to divide your financial goals between things you need versus those you want. Only you will know the difference.
For instance, you need money for food, shelter and medical expenses. You probably also need to cover the costs of transportation, insurance, education, maintenance, and clothing. Some minimal amount for recreation could also be considered a need.
Assign dollar amounts to these things. When in doubt as to “how much”, choose higher amounts. While there will be good things not predicted in your budget, bad things happen, too.
What do you want?
Do you want to upgrade your ‘needs’, e.g. with a bigger home or more nights eating out? Do you want to travel more? Are there charitable causes you would like to advance? Do you want to enhance your children’s wellbeing while you are around, and afterward?
For each dream there is a definable range of costs. Similar to planning for life’s needs, you can add these costs into your calculations to help some dreams become reality.
How do you get there?
Chapter 44 in our book A Consumer’s Guide to Harful Fincancial Products shows the math involved with calculating amounts you need to save to reach your retirement goals. But you need not study the math to get the answers. We built a calculator for you.
With some sense as to your your current level of financial assets, your post-retirement budget and income, you can discover the amounts you should be saving with an unlimited number of retirement age and investment return assumptions. Click here to access our retirement savings calculator.