If you want to retire earlier, especially if you are a late starter to retirement planning, time is not your friend. But there are steps you can take right now to grow your nest egg.
A widely established business practice (known colloquially as Pearson’s Law) states: What you measure improves and what you measure and track improves exponentially. If this is true, we need to make sure we’re measuring the right things.
To simplify retirement planning, we can drill it down into two major components: income streams and assets. Back in the day, when people had pensions, they were guaranteed an income stream in retirement. My father was a captain in the U.S. Navy and retired with both a pension and Social Security.
My father never had to worry about his retirement income. Two checks were deposited in his bank account each month like clockwork, and every year, the amount increased with inflation.
Most Americans today don’t have pensions (unless you are a teacher or career military). Instead, you are saving in some kind of defined-contribution plan, like a 401(k). Your monthly investment in your retirement plan will provide your future lifetime income. You may be eligible for Social Security, too, but your 401(k) is going to be a major part of your income.
The Employee Benefit Research Institute’s 2018 Retirement Confidence Survey found that “8 in 10 workers expect their workplace retirement savings plan to be a source of retirement income, including half who say it will be a major source.”
While workers were planning on tapping into these plans for income during retirement, the study found that “only half of the workers are confident that they know how much income they will need each month in retirement or how to withdraw income from their savings and investments, with only 1 in 8 very confident.”
In other words, many people aren’t quite sure how to strategically use their savings so they will last a lifetime.
One way to increase retirement confidence is to build a bigger nest egg. In my 30 years as a financial planner, I’ve never had anyone complain they saved too much money!
If assets we build now are going to be a major part of our retirement income, we should follow Pearson’s Law. Track the growth of your net worth so it improves and “grows exponentially.”
A good place to start is to put together a simple one-page financial statement. This does not need to be overly complex. You could create a net worth statement, which is a list of what assets you own and what liabilities you owe to come up with a bottom-line estimate of what you’re worth.
Your net worth is the needle you want to move. You are responsible for creating your own lifetime income stream — the assets you build now will provide your income tomorrow. Start with a one-page financial statement and focus on growing your net worth.
So put together a list of the value of what you own minus what you owe. Date it, and then revisit it four times a year. Over the years, it will be amazing to look back at where you were and how far you’ve come.
Update your net worth on a spreadsheet which you can print out or simply write on a piece of paper. You can also use technology to help, like online aggregators such as Mint, Personal Capital or through your financial institution (like Hello Wallet for Key Bank customers) which update your bank accounts and investment values automatically. You’ll just need to add the assets that might not automate, such as your home value.
Once you have this one-page document, you can refer to it when making money decisions. Before you pull out your credit card, ask yourself, “Is this growing my net worth or not?”
Then you’ll make better money decisions simply because you have a framework for your goals. Do you want to move the needle more efficiently, so you can retire earlier? Put together a net worth statement and then review and update it every quarter.
What you measure increases and what you track and measure increases exponentially. Track and measure your net worth to set yourself up for financial success now and in the future.
