Editor's Note: In a previous version of this column, Rob Arnott was mistakenly credited as the editor for the Journal of Financial Planning. Arnott is a former editor of the Financial Analysts Journal. Danielle Andrus is the current editor of the Journal of Financial Planning.
You may or may not maintain a Net Worth Statement. These statements are more than just a way to “keep score” of your how your assets have grown or how much debt you reduced. Perhaps a better reason to maintain a Net Worth Statement is to think of it as a way to measure your income production. When we retire, the true measuring stick of an asset is not what it’s worth, rather, it’s how much income it can safely produce once your income from working stops.
Many of the largest assets we own don’t produce any income at all -- our home, land, vehicles, a boat, or a lake house. While these are important assets on our Net Worth Statements, how will they produce income for you when you retire? If your net worth comes 70% to 80% of the non-income producing assets, that’s going to be a problem one day when your working income stops. Here in East Texas, land is typically a major asset on most of the Net Worth Statements I see. While some land can produce income (timber sales, leasing it for livestock, etc..), my experience is that kind of income may be sporadic. In addition, when you deduct all of the various taxes and upkeep costs, the true value is reduced even more. While I’m not suggesting you sell your property, boat, lake house, etc.. I am suggesting you look at balancing your assets between those that will be able to produce assets and those that won’t.
There’s also the inflation factor. Although inflation has been quite tame for many years based on the Consumer Price Index (CPI), that doesn’t always mean that’s your personal inflation rate. For example, CPI has been around 2.50% per year on average for the last 30 years according to the Bureau of Labor Statistics. But your personal inflation rate may be 3.5%. Finding your personal inflation rate does take a little work. You will need to track your monthly expenses for a minimum of three years. Then you will need to see the percentage change from year one to year two, year two to year three, etc... This exercise is even more important if you’re within five years of retirement. How are your income producing assets keeping pace with your personal inflation rate?
Rob Arnott, former editor of the Financial Analysts Journal, recommends a combination of stocks, bonds, real estate, and fixed-rate annuities to produce a non-correlated, inflation-adjusted cash flow over a long period of time. Arnott says the annual percentage return you earn each year isn’t nearly as important as the how much spending power these assets can maintain over the years. While these types of assets may carry risk, Arnott recommends a balance of them on your Net Worth Statement.
I would encourage you evaluate the “balance” of your current assets. Make sure you aren’t over-weighted in assets that may not be able to produce an income when you need it.
Matt Montgomery has 39 years of experience as a financial advisor. Securities offered through Royal Alliance Associates, Inc. Member FINRA, SIPC. Advisory services offered through Matt Montgomery, a Registered Investment Advisor not affiliated with Royal Alliance Associates, Inc., 1504 East Rusk, Jacksonville, Texas, 903-586-3494,Mutual funds and exchange-traded funds are sold only by prospectus. Please consider the charges, risks, expenses, and investment objectives carefully before investing. A prospectus containing this and other information about the investment company can be obtained from your financial professional. Read it carefully before you invest or send money. * An Index is a portfolio of specific securities (common examples are S&P, DJIA, NASDAQ), the performance of which is used as a benchmark in judging the relative performance of certain asset classes. Indexes are un-managed portfolios and investors cannot invest directly in an index. Past performance is not indicative of future results.