Measuring and Tracking Retirement Plan Progress

If you are like this baby boomer, you are eager to find ways to measure and track the financial progress of your retirement planning. There are a variety of tools on the web that will rate or score how well you are doing with your retirement investing and planning. Not all of them are convenient to use on a regular basis. Those that are easy to use sometimes don’t give you any real metrics that make sense or that you can follow yourself. Let me tell you some of the things that I do to track our retirement plan progress.

First, I monitor our net worth weekly. We use Quicken for our financial management and link it to all of our bank, investment, and asset accounts. Merely opening the program and downloading data from our various accounts gives me an instant net worth report. I can chart our net worth over time. This tells me if we are generally making progress with our investing, saving, and spending.

Second, I monitor the total value of our retirement assets weekly. I have our various assets that are designated for generating retirement income organized together so that it is easy to see the total value of those assets as well as our internal rate of return. These assets include our 401(k) account, IRAs, I-Bonds, stocks and mutual funds held in taxable accounts, insurance cash value, and net equity in real estate that we will eventually sell to reinvest for income generation.

None of this is particularly novel or surprising to anyone who is actively involved in their own retirement planning. But I don’t think this is enough. To properly measure progress and provide increased motivation, I think you need to estimate what kind of income your retirement assets will generate. There is a relatively easy and informative way to to do this: I determine how much lifetime income I would receive if I annuitized the lump sum value of our retirement assets.

You can do the same thing. Let’s assume that, like us, you are monitoring and tracking the current market value of your retirement assets. Today they are worth $500,000. You pay a visit to ImmediateAnnuities.com and plug-in that number along with your other relevant personal data. Let’s further assume that you are a 58 year-old male living in Tennessee.  If you purchased an immediate life annuity with no payments to beneficiaries, your $500k would buy you $2,667 in monthly income for life.

It’s not that important which type of immediate annuity you use to track your retirement plan progress. What is important is that you use the same annuity type each time you check. I recommend doing it monthly or quarterly. The result will give you an income-based measurement of your plan progress while also taking into account your age and current market conditions. (The market conditions are generally reflected in the estimate of annuity returns.)

If you want to take this method one step further, you could also compare the annuity income number to a retirement spending budget that you have created and keep updated using current dollars. In other words, assume that in December 2009 the market value of your retirement assets would generate $2,667 in monthly annuity income. Further assume that your budget shows you will need a monthly income of $4,000 in today’s dollars when you retire. This leaves a deficit of $1,333 that will need to be covered by Social Security or other income.  Run the same numbers a year from now to determine if that gap is getting larger or smaller. If the gap shrinks, you are making progress with your plan. If the gap is increasing, you need to consider making some changes to your plan.

This method of tracking your retirement plan progress does not mean that you will annuitize all or even any of your retirement assets. It simply tells you what would happen if you did.  To give you confidence that this is a relevant metric, even respected retirement planning tools like Financial Engines use lump sum annuitization techniques to assess and report the strength and progress of retirement investing.

The bottom line to me is that you must actively monitor, track, and measure how you are doing with the financial part of your retirement planning. Relying on others or on vague assessments without real numbers won’t tell you much.

Do any of you track your progress by these or other techniques?


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