For a while now, I’ve been thinking about a better way to publicly track my progress towards financial freedom and also allow easier comparisons between readers. I’m sure some people would miss the net worth updates, but I have reached the point where our net worth fluctuates mainly with stock market valuations and not due to actual improvements to income or savings rates.
First, I started to brainstorm the required data needed for such tracking, each of which I can address in a future post. Once we collect these numbers, I can then put out some numbers and ratios that could be better indicators than plain net worth. Heck, a portfolio of a million dollars is nothing if you plan on spending $100k a year, but if you only spend $40k a year and have a small pension, you could be all set.
- Current Monthly Income (After-Tax)
How much money are you taking in right now? For those with variable paychecks, it would probably be best to average this out over the trailing 12-months or 6-months.
- Current Monthly Spending Rate
How much are you spending? This should also be averaged out over at least 6 months, in order to capture all those irregular bills like my semi-annual car insurance bill, as well as those unexpected expenses that always pop up. For example, in the last few months alone we have had an $1,000 electrician bill and a $500 auto repair tab.
- Current Portfolio Size
How big is your current investment nest egg? If you include your house, then you’ll need to include the cost of renting in your future spending.
- Future Spending Rate
What is your “burn rate” going to be in retirement or semi-retirement? Many online calculators simply assume this is 85% to 100% of your current monthly spending. This can be too generic. For example, in less than 20 years, I plan to have my house paid off. My mortgage is more than 50% of my current expenses! Other items like health insurance premiums will be harder to predict.
- Investment Return
There are many smart folks making educated guesses about future market returns based on both looking backwards and forward. Based on your chosen asset allocation, one can at least attempt a rough estimate of future after-inflation returns. We can’t rely on these numbers, but it’s a good beginning.
- Safe Withdrawal Rate / Retirement Income Rate
How will you create your income during retirement? If it’s going to be from selling stocks or bonds, you’ll have to decide on how much is okay to withdraw each year so that you don’t run out. Will you draw a fixed percentage each year? Adjust annually for inflation? Adjust annually for market returns?
What if you are planning to live off dividends or bond income? What if these fluctuate? If you have a pension or annuity, how will this fixed income change how you draw down other assets?
A simple example would be calculating your personal savings rate, which would be independent of market fluctuations for most people:
Multiply by 100 for a percentage. Hopefully this isn’t negative! Another good ratio might be your portfolio multiplier factor, which tracks how big your portfolio is relative to your planned future spending.
Depending on who you talk to, a Portfolio Size Factor of 25 to 35 might be desirable if you are withdrawing money from a portfolio of 60% stocks and 40% bonds. Adjustments should be made for pre-tax vs. post-tax accounts.
I could post these and other monthly indicators each month, instead of net worth. What do you think? Any other numbers that I’m missing?