In the business world, a balance sheet is a point-in-time, financial report that describes a business’ assets (equipment, inventory, etc.), liabilities (debt) and equity (the owner’s investment). In the end, the assets must equal the debt plus the equity, or the company fails.
Individuals (and couples) also have balance sheets, including a Retirement Balance Sheet, where the assets must also equal the liabilities. Retirement planning is essentially creating the balance sheet and adopting strategies to ensure the assets = the obligations over time.
Wade D Pfau, Ph.D., CFA, RICP, the author of The Retirement Researcher’s Guide Series - Safety-First Retirement Planning book uses the following (summarized) illustration:
Retirement Balance Sheet
Human Capital (earnings)
Fixed Expenses, including healthcare (needs)
Discretionary Expenses (wants)
Pensions/ Annuities and Life Insurance
Financial Assets (investments)
Contingencies (unexpected expenses)
Social Security/ Medicare
Family and Community Support
Once calculated, the goal of financial planning is to adopt tactics and strategies to maximize and manage the balance over time. To identify the tactics, one only need to look to the balance sheet itself; they include:
- Working longer or part-time,
- Downsizing your home or using a reverse mortgage,
- Considering an immediate annuity,
- Saving and investing more,
- Managing retirement expenses and reducing debt,
- Delaying Social Security or,
- Looking to your greater family for help.
So, as one contemplates retirement, start with your balance sheet and then use it to identify and adopt the appropriate strategies to bring it into balance.
Photo: June 2020, by KWR, Lanesboro, MN.