Key Financial Wellness Metrics for Near-Retirement Individuals

As one approaches retirement, monitoring your financial situation by understanding your net worth and assessing the assets and resources needed to maintain a comfortable lifestyle throughout retirement is vital. This article explores eight key financial wellness metrics individuals must monitor as they approach retirement.

1. Income Replacement Ratio
One of the primary financial wellness metrics is the Income Replacement Ratio (IRR), which calculates the percentage of your pre-retirement income that your retirement income will replace. Many individuals work toward a target ratio between 70-80%. Therefore, if you currently make $100,000 annually, your retirement income should ideally be between $70,000 to $80,000.

2. Net Worth
Net worth is one of the most fundamental financial wellness metrics, measuring the total assets, including savings, personal properties, and investments, minus any liabilities or debts. This metric gives an essential broad picture of your financial health and indicates financial stability that may allow you to support yourself comfortably in retirement.

3. Liquidity Ratio
The liquidity ratio is another critical metric that measures your ability to cover short-term expenses without selling long-term assets or taking on additional debt. This ratio is calculated by dividing your liquid assets, such as cash, savings, and short-term investments, by your current liabilities. A ratio of 1 or greater indicates a healthy level of liquidity.

4. Savings Rate
Your savings rate, the percentage of income you put aside for savings, is a critical component of retirement planning since it directly impacts the savings you’ll have available to support yourself. Financial professionals often recommend a savings rate of 10% to 15% of gross income. However, the savings rate may change depending on one’s situation, market conditions, risk tolerance, and timeline until retirement.

5. Debt-to-Income Ratio
Recognizing your level of debt is equally important when preparing for retirement. The Debt-to-Income Ratio (DTI) compares your total monthly debt payment to your gross monthly income, providing a deeper look at how you manage your debts. Lenders often use this metric to determine your ability to manage monthly payments and repay borrowed money. A lower DTI ratio indicates a good balance between debt and income.

6. Medical Expense Forecast
Healthcare can be a significant expense in retirement. Understanding your likely medical costs can help you plan for this considerable expenditure. Consider your current health status, anticipated medical needs, family medical history, and potential long-term care costs.

7. Retirement Savings Lifespan
Another crucial metric involves determining how long your retirement savings may last. By evaluating your expected annual withdrawal rate alongside your total savings and expected longevity, you can estimate the lifespan of your retirement savings.

8. Investment Diversification
Lastly, investment diversification, the degree to which your assets are spread across different types of investments, is a crucial metric in mitigating risk. A diversified portfolio may provide greater independence, especially during volatile market periods.

Since everyone’s retirement journey is different, these metrics provide a starting point to determine what is appropriate and realistic for your circumstances. It’s always advisable to seek assistance from a financial professional since calculating these metrics on your own may be complex. 

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by Fresh Finance.

LPL Tracking #502413-04

Sources: