“wealthcheck” and retirement preparedness


“wealthcheck” is revealing at all stages of your working life

wealthcheck and retirement preparednessIn our previous article, we introduced our new service called “wealthcheck”. We consider it the personal finance equivalent of a medical check-up with your doctor or a physical at the local gym. It’s for people who want to know where they stand financially, but don’t feel comfortable self assessing, and know that their friends’ financial behaviours aren’t likely to be a good guide for them.

In this, and our next couple of articles, we demonstrate the power of the “wealthcheck” framework to assess the financial vulnerability of couples that superficially appear similar, at various years from their desired retirements (or desired time of financial independence). Financial vulnerability is measured relative to a goal of financial independence – the ability to finance your desired lifestyle indefinitely from your investment wealth, without the need to work.

This article considers two couples, John and Jan Johnson and Greg and Gina Green, who are both seven years away from a desired retirement date. Subsequent articles consider the position of couples who are seventeen and twenty seven years away from a nominated retirement date, demonstrating the applicability of the framework regardless of stage of working life.

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What does financial independence look like?

What does financial independence look like?The “Personal Financial Dashboard” provides the answer

Most of us would like to have enough money in the form of investments so we could choose whether and how much we want to work and still afford the lifestyle we want. We call this financial independence.

But while financial independence is a great goal, a big problem is that it’s not simple to work out how you get there or even to know when you’re there.

In August 2011, we introduced an early version of the “Personal Financial Scorecard”, a graphical format that records a client’s progress and current position on some key indicators of personal financial independence. At that time, the “Scorecard” was, admittedly, fairly experimental.

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Household income and wealth in Australia

Household income and wealth in Australia

Official statistics provide income and wealth insights

In the latter part of 2011, the Australian Bureau of Statistics released three publications [1] that together provide valuable insights regarding household income and wealth in Australia. The surveys supporting the statistical releases were conducted in 2009-10.

The publications provide the most comprehensive and up to date data, on a state and national basis, for a number of key financial planning and wealth management “progress indicators”. In this article, we will focus on how those in the top quintiles (i.e. top 20%) by household net worth and income are performing in terms of benchmarks we monitor for our clients. The aim is to assess the “financial health” of the nation’s wealthiest 20%.

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How does your “Personal Financial Scorecard” look?

How does your “Personal Financial Scorecard” look?

A picture paints a thousand words…

Our recent article, “What is “The Value of Financial Planning”?”, introduced a number of key metrics that we monitor to assess clients’ progress toward meeting their financial objectives. Together with some additional important measures, a “Personal Financial Scorecard” can be created for each client.

This Scorecard succinctly captures financial progress and highlights strengths and weaknesses in a client’s current situation. It’s easy to see whether a client is on track to achieve their desired financial future and what steps they need to take to enhance their financial position.

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Why are most millionaire doctors and lawyers Income Statement Affluent?

Why are most millionaire doctors and lawyers Income Statement Affluent?
Doctors and lawyers are inefficient at turning high incomes into wealth

In both his most recent book, “Stop Acting Rich”, and his previous best selling books, “The Millionaire Mind” and “The Millionaire Next Door”, Dr Thomas Stanley, US researcher of the behaviours of wealthy people, distinguishes between millionaire households that he calls Income Statement Affluent (“IA”) and Balance Sheet Affluent (“BA”).

Stanley defines millionaires as those holding more than $1 million in net investment assets. The family home and other lifestyle assets are excluded from this measurement, as they are seen primarily as sources of consumption rather than avenues to true financial independence1.
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Measuring your current asset allocation

You need to know your current asset allocation

Measuring your current asset allocationIn our last article, “Choosing your target asset allocation”, we discussed the key determinants of the choice of your target asset allocation. But in developing an investment strategy designed to reach your target by retirement it is essential to have a meaningful measure of your current asset allocation.

For those who expect to continue to accumulate wealth from business or employment earnings, the traditional ways of measuring asset allocation are not very helpful. A better approach to asset allocation takes advantage of our “Projected Lifetime Investment Wealth” framework. It takes a much broader view of wealth and provides valuable insights relevant to answering many typical personal finance questions e.g. how much could or should I borrow, how should I build my risky growth asset exposure over time, can I afford a larger home.
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