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Step 3: Estimating your retirement net worth

Once you have identified each retirement expense you can now begin to estimate your net worth in retirement by calculating the future value of your liabilities and assets as outlined below.

Required tools: You will require the following tools available within the InvestingForMe Tools section:

Remember: Your Net Worth Statement subtracts the current value of all your liabilities from the current value of all your assets. The resulting dollar amount is called your net worth.

Begin by transferring your current asset and liability information from your Net Worth Statement into the Retirement Net Worth Statement. Again, your current information should be listed in the first column under the Estimated Current Value heading.

Once this retirement net worth estimate is complete you are now able to begin estimating the future value for your liabilities and assets.

Estimating the future value of your liabilities

Ideally you should begin your retirement with no liabilities (no mortgages, personal loans, a zero-balance on all lines of credit, no carry-forward balances on credit cards, etc.). However, if you currently have liabilities, then you should make every effort to pay these down before you begin retirement. Your debt management plan can address your liabilities over time, or you can incorporate their payment within your retirement plan by selling assets, prior to retirement, and using the proceeds to pay off the liabilities. Either way, you should establish a plan to deal with your current liabilities.

Note: InvestingForMe provides specific tools you can use to compare the benefits of consolidating your debts and the payment options that help you to pay down your debt sooner. The tools include:


Estimating the future value of your assets

Estimating the future value of your assets is always difficult because it requires you to make a number of assumptions based upon past experience for the following criteria:

  • average annual rates of returns for your financial investments
  • average annual rate of return for your real estate assets
  • assumptions about the future economic, business and investment cycles.
  • the level of inflation in the future
  • your future ability to add to your savings
  • your future employment status

Often the assumptions you make will be shaped by your most recent experience. So try to remain realistic when making assumptions. For example, if your real estate values have increased 30% in the last two years, do not assume this rate of increase will remain constant for the years leading to your retirement. And if the value of your financial assets have not increased or declined in value, you cannot assume they will perform similarly in the future. So try to make conservative and realistic assumptions, use estimates that better represent the asset’s increase or decrease in value over a 10-year period. This will help to smooth out any short-term fluctuations.

Note: When attempting to estimate future asset values, it is often best to be conservative in your assumed rates of return. Your retirement income will include a component that will be generated by your accumulated savings and using overly optimistic assumptions can compound retirement planning errors, by inflating the plan’s stated assets and, consequently, overstating your investment income in retirement. If you are unable to achieve your assumed rates of investment returns, not only will you not have sufficient savings accumulated to support your retirement, you will also come up short on retirement income.

Remember: When it comes to estimating future levels of inflation, make sure you are comfortable with your assumption and its impact upon your future asset values and income. Keep in mind the fact that even though the investment industry has been adamant about the future threat of inflation for over 30 years now, inflation has been declining for over 31 years. In fact in the past 31 years, inflation has declined in every year except one.

With your current asset values and financial assumptions in hand, you can now use the Projected Annual Portfolio Value Comparison calculator to estimate the future value of your assets.

Begin by estimating the future value for each asset in your Retirement Net Worth Statement. For example, if the current value of your home is $400,000, then in the Projected Annual Portfolio Value Comparison enter this amount as the value for Starting Portfolio. Now enter the remaining information, including your assumptions about the Expected Return, Starting Year, and Starting Age. This calculator will calculate and list the future projected values in its tables. If your retirement date is in five years, then transfer the value calculated for your home on the 5th year line into your Retirement Net Worth Statement.

Note: Simply repeat the same steps for each asset listed. However, many of your listed assets are depreciating assets (such as boats, cars, planes and personal property) that do not require the use of the Projection Calculator. The future values of these assets are subjective and will in most cases be worth the same or less than they are today.

Now you are ready for step 4; Estimating your retirement income

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