Key Financial Wellness Metrics for Retirement-Focused Individuals

Key Financial Wellness Metrics for Retirement-Focused Individuals

January 11, 2024

Key Financial Wellness Metrics for Retirement-Focused Individuals


In planning for “retirement”, whatever that word may mean to you, it’s vital to understand your net worth now – and to assess what assets and resources will be needed “after retirement” to maintain a lifestyle that is comfortable for you. This article explores eight key financial wellness metrics.

  1. 1. Income Replacement Ratio

One such metric is the Income Replacement Ratio (IRR). Will you need more or less income if/when you decide to stop “working” – or for any reason aren’t able to continue? This IRR calculates the percentage of your pre-retirement income that your retirement income will replace. A common target ratio range is somewhere between 70-80%. If that’s your ratio, and if you currently make $100,000 annually, your retirement income should ideally be planned for the range $70,000 to $80,000 a year.

  1. Net Worth

Net worth is a key financial wellness metric. It measures the value of your total assets, including savings, personal properties, and investments, minus any liabilities like mortgage debt, auto loans, credit cards, student debt, etc. This metric gives an essential broad picture of your financial health right now, and helps to identify financial goals that – if met -- might increase the odds that you’ll be able to support yourself comfortably in retirement.

  1. Liquidity Ratio

Another critical metric, the liquidity ratio 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.  Does it match your notion of how long you are likely to live, barring the unexpected?  

  1. Investment Diversification

Lastly, investment diversification, the degree to which your assets are spread across different types of investments, is a crucial metric in assessing how well managed is your risk of financial loss. 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.

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.