The Million Dollar Question: “How Am I Doing?”

You may have seen the television ads that pose the big question: “What’s your number?” The number refers to the balance you need in your investment account to live comfortably in retirement. If these ads make you wonder how you are doing, you are not alone.

A single specific number cannot answer all your financial questions. Still, financial feedback is very valuable.

Whether in school, on the job or at the gym, feedback is essential for meeting goals. It reinforces good habits and motivates behavior changes when they are needed. So, are you making appropriate progress toward your long-term goals, or do you need to make some changes?

There are many different ways to answer these questions. Let’s start with the most straightforward, but perhaps the least helpful.

A December 2012 Wall Street Journal article featured the following information about household net worth and household annual income defined by approximate cutoffs for top percentiles. For instance, if your household net worth is $1 million, you are in the top 10 percent nationwide.

Beyond the rankings

Rankings give us information, but not much insight. Wealth and income rankings do not take into account age, family size, spending habits, local cost-of-living and many other factors. One million dollars in rural Tennessee is a big nest egg. The same sum won’t last so long in Manhattan.

Further, rankings can only tell us how well we are keeping up with the Joneses, or millions of Joneses. Financial well-being is a far more personal issue. Really all that matters is where we are relative to our own goals.

Ultimately, we need our money to support our desired lifestyle until death, as well as allow us to help loved ones, support charitable causes and so on. Goals vary widely from household to household, making it impossible — and completely irrelevant — to evaluate progress in comparison to the neighbors. Some families can live happily ever with a $1 million investment portfolio. Other families might hope to give that much away every year.

The question to ask: Will my income and investments allow me to meet my goals?

For example, consider whether you can retire according to your plans, travel when you wish, have a vacation home, make a difference through philanthropy or fund college for your children or grandchildren.

One good way to help explore these areas is typically through Monte Carlo analysis, a powerful computer-based technique that runs thousands of simulations based on current assets, savings habits, long-term cash flow needs, life expectancy and the wide range of performance we may see in markets over time. The output of Monte Carlo analysis is a probability — such as that you have a 90 percent chance of meeting your goals. Based on the inputs, your number could be lower, or it could be higher. This feedback can help you judge your progress and identify needs to alter your spending or savings behaviors, or adjust your goals.

It’s personal                                         

Simply earning a lot of money is no guarantee of long-term financial health. This comment can elicit skeptical looks from investors currently saving for retirement, but for so many people, it’s a reality.

Consider an investor who has a reliable cash flow from a pension and Social Security. With modest spending habits, she has everything she needs, so it is difficult to come up with a scenario where she would run out of money. With absolutely no financial worries, she has managed to achieve this lifestyle without having a million-dollar portfolio. Many retirees who are living comfortably today do so because of the way they approach both spending and saving.

We are all aware of stories about professional athletes and others in the public eye who manage to squander tens of millions of dollars through reckless spending and irresponsible investments. Spending and saving habits have a far greater impact on financial well-being than most people realize. We cannot control the stock market, but we can control our own spending and saving habits and we should.

“How am I doing?”

This is a great question to discuss with your investment advisor. The feedback will help you stay on track.

Copyright © 2013, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.

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