If you don’t already have one, you need to sit down and make a personal balance sheet.
I call this product a financial or net worth spreadsheet because I like to tailor it to individual needs.
Things to Include
My version of this product uses an Excel spreadsheet to account for: 1) Bank accounts, 2) Investments, 3) Equity, and 4) once vested, Defined benefit (pension) estimated balances until age 95.
Below the cash, investments, equity, and retirement box, I list credit scores and gains/losses by year for the life of the net worth spreadsheet.
After several years, the annual gain/loss portion will give you a snapshot of how much your money hopefully grew.
I track major debt such as house and/or car payments at the bottom. In the equity section, I only account for existing equity [Estimated home value – remaining mortgage] minus six percent estimated realtor fees.
Six percent is the general real estate industry commission standard, but some firms such as REDFIN have lower commission rates while some larger real estate markets may ask for higher commissions.
I don’t count vehicles as a credit, so there isn’t a need to account for the difference. This approach means you don’t have to subtract debts from assets to arrive at your estimated net worth.
On our personal net worth estimate, I also include a box for insurance coverage with payout values, premiums, and end dates for term coverage.
I dedicate another box to dividends categorized by retirement and non-retirement accounts.
The final things I include at the bottom are estimated retirement payments from Social Security, pensions, defined contribution plans, individual IRAs, and any other source of estimated income by spouse.
The by-spouse section represents our analysis of what would happen financially if one spouse passed away.
This portion of the spreadsheet essentially turns our net worth estimate into a one-page snapshot of our finances.
It works for us, but in the beginning, your spreadsheet may just account for major assets, major liabilities, credit scores, and annual gain/loss.
Preparation is a Key to Success
During working years people tend to think about wages or owner draws as their primary income sources, but in retirement, if you planned ahead, you’ll have multiple bins of existing and new money to draw from.
Think Social Security, pensions, 401K or 403Bs, IRAs, annuities, rents, etc.
It’s amazing, if you save, invest, and prepare, a person can potentially make and retain more money in retirement than they did during their working years.
It seems counterintuitive, and no matter how much analysis you do to demonstrate to your friends that this is the case, it often takes a few years of personally experiencing this phenomenon before it sinks in.
Once it sinks in, people that prepared for retirement often ask themselves, “why didn’t I retire sooner?”
There’s a lot going on in the net worth estimate below, but re-read this blog, study the example, and think about your situation. Once you get an idea of what’s important to you, tailor a simple spreadsheet to your needs.