The 5 Key Performance Indicators To Help Measure The Health Of Your Retirement Plan

My name is Brian Scribonia and on this episode of the Common Sense Financial podcast, then you have the cash flow ratio. This is really important. The lifeblood of any financial plan is cash flow. But what I find is that many people have a difficult time defining what this means. Some people think of cash flow as the amount of net income they have coming in, while others think about it in terms of their total monthly expenses. These interpretations of cash flow often exclude such things as taxes, retirement savings, and health insurance premiums, which leave gaps in understanding the big picture. The problem with this net approach is that you cannot solve a problem you cannot see or understand, and therefore you cannot effectively manage cash flow if data is missing.

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Opportunities are still there. The attempt at passing down wealth from generation to generation. Consider the outcome, not just popular opinion and the whole teaching there is about preparedness and being ready. There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host Brian Scribonia. Thanks for tuning in and let's get into today's topic. It is well known that business owners use KPIs or key performance indicators to track and understand the health of their business and their marketing efforts. And much like running a business, those planning for retirement should consider their retirement KPIs to help measure the health of their financial situation. Now for some people, retirement can seem overwhelming, while others can sometimes oversimplify the process. But regardless of which camp you fall into, it is a good idea to know what information to pay attention to and understand how to prioritize it. In my experience, people often make the mistake of substituting investment performance for more meaningful key performance indicators. And of course, yes, performance is helpful and it's important, but it actually has little to do with the overall health of your financial plan because it is often an uncontrollable variable. What I find is people often view their finances in silos, such as their investments, and tend to make standalone decisions about what to do while leaving out other important variables concerning their situation, which can result in having gaps in their overall retirement plan design. For instance, the stock market can move the value of a portfolio negative, but that doesn't always mean the portfolio or the financial plan needs to change. On the other hand, the stock market can be performing very well, but your financial plan may need to be adjusted. That is why knowing what KPIs to use and how to use them can help measure the health of your overall financial situation, not just track portfolio performance. So what is a KPI? A KPI is simply a collection of data points that helps provide a consistent method for measuring and monitoring the health of your retirement plan. Companies often use KPIs to measure such things as their marketing and hiring initiatives to help them understand the results of the effort. When using KPIs in a retirement plan, the data points may of course differ from a business, but they are just as important, if not more important, considering what's at stake. It's in my experience, there are five key data points needed to measure the effectiveness of a retirement plan. The first is passive income. Income is an obvious component and the central theme of a retirement plan. But after examining thousands of portfolios over the years, I find that very few plans actually produce income. In my experience, the reason for this is the misunderstanding of what constitutes income. Income is not growth of a share or unit of a particular investment. It is the income generated from the share or unit of an investment. There is a difference, and it is one of the five KPIs that must be measured in order to understand the level of income you can expect from your assets. If there is a retirement income gap of $5,000 each month, the goal of the retirement plan is to not simply cash out investments each month or spend down savings. To meet the goal, it is to create passive income sources that can consistently provide the cash flow. So missing this point can be catastrophic to the longevity of a retirement plan. Then you have the effective tax rate. Taxes are part of life, but there are strategies that can be used to help minimize the impact the liabilities have on your cash flow. To understand the impact of taxes, you need to first understand that our tax rates here in the United States of America are progressive. The more you make, the higher the marginal rate is on portions of your income, and marginal rates have their place when filing a return or making decisions about asset Positioning, amongst other things. But marginal rates are not one of the KPIs we track. We look at them, but we don't track them. We focus primarily on what is known as the effective tax rate, which is a single rate that's calculated using the total taxes that are paid against the gross income. This percentage gives us a better overall understanding of the impact taxes are having on the retirement income. For instance, if the retirement income gap is $5,000 each month and the effective tax rate is 30%, we can determine the additional amount of income required to cover the tax liabilities. It also helps to understand that the more tax mitigation techniques you incorporate into a retirement plan, the less pressure there is on your assets to have to generate additional income just to pay the tax. Then you have the cash flow ratio. This is really important. The lifeblood of any financial plan is cash flow. But what I find is that many people have a difficult time defin what this means. Some people think of cash flow as the amount of net income they have coming in, while others think about it in terms of their total monthly expenses. These interpretations of cash flow often exclude such things as taxes, retirement savings and health insurance premiums, which leaves gaps in understanding the big picture. The problem with this net approach is that you cannot solve a problem you cannot see or understand and therefore you cannot effectively manage cash flow if data is missing. It is also important to know the ratio of income to bank payments, taxes, savings, insurance, as well as fixed and variable expenses, and the ratio of earned income versus passive income, along with the number of different income sources you rely on to fund your lifestyle. So there are quite a few points within just the cash flow KPI. Next is knowing your banking capacity. When thinking about your assets allocation, there is often the out of the box structure where assets are divided up between investments and bank accounts. The idea is that people want to have money invested to grow and they also want safe money stashed away in case of an emergency. But this approach oversimplifies a more complex situation and overlooks the realities of life and how people actually use and spend money. There are many factors to consider outside of just growing assets and covering emergencies such as big ticket purchases and other family needs that could benefit from incorporating a family bank into the financial plan. When speaking with a lot of highly successful people, I often hear references to having or wanting a family bank. And when they reference this, they are most often referring to what is known as a specially designed life insurance contract or what we call build banking. A specially designed contract enables a family to have banking capabilities within their own financial ecosystem without relying on an actual bank outside of their financial situation and without interrupting the growth of the contract. This is one of the pieces I find missing when reviewing many financial plans, and it is something that can easily be incorporated when you're working with the right team of advisors. Knowing your bank capacity is a KPI that has proven in my experience, to be a solid anchor to the overall health of your retirement plan. Next is the idea of horizontal asset allocation. When it comes to asset allocation, there really needs to be an understanding of the reasoning behind the diversification. I suspect based on the thousands of conversations I have with people that when you think about diversification, you envision a vertical landscape of public market investment such as stocks, bonds and mutual funds or ETFs. The mistake people often make is thinking if they have a variety of these types of investments, that they have their assets diversified. But when it comes to retirement, this may not be the ideal approach. Adding more of the same thing to your portfolio doesn't mitigate the exposure to the risks you're trying to diversify away from. I'm not a gardener and I know very little about plants, but I do appreciate a well designed landscape. The variety of colors and the sizes and the types of plants, that's what makes the landscaping pleasing to the eye. A good arbonist knows what plants to plant, where to make the garden attractive, but they also know how to use plants to minimize disease, manage growth and keep the bugs away. And much like a physical garden, the approach we use for asset allocation is similar to help manage growth, produce income, minimize risk and mitigate taxes. Adding things such as real estate, businesses, private equity, life insurance, annuities, amongst other things, can provide characteristics and other elements of stability to help support a retirement plan. So in conclusion, the biggest challenge for tracking these KPIs is is having the know how and the technology to pull the data together and make sense of it. Most financial planning software that I run across that's available to the public and even for financial advisors tends to focus in on hypothetical forecasts or what are what are known as Monte Carlo simulations that could be helpful when testing an investment portfolio after the fact. But it's not a substitute for the creation of a retirement plan. To develop a retirement plan, you must really first identify the gaps in your existing situation and then begin to work out on strategies to help fill the gap. Having a way to measure passive income, tax exposure, cash flow, asset allocation and your banking capacity, those are the first steps in knowing where to begin jumping straight into building a portfolio or rushing to just simply rearrange the chairs on the deck is not a recommended approach to such a complicated and important life. Eventually, a tool that we created and used to look at these KPIs synergistically is the Gap report. This is a 21 point diagnostic assessment tool that helps identify the gaps that exist within your current financial picture. You can learn how to obtain your own GAP Report by visiting brian scribonia.com thegapreportstart all one word and I'll link to that in the show Notes. This tool really though can help you remove the guesswork out of designing a retirement plan. So that concludes today's show. I'm Brian Scribonia. Thank you for listening to the Common Sense Financial Podcast.

Thanks for listening to today's show. If you liked what you heard, be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release new episodes. I'm Brian Scribble and this is the Common Sense Financial Podcast.

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