How to determine if you are ready to retire or not, in one simple number–The Funded Ratio

How do you know if you can retire? How can you tell if you’ve saved enough and can truthfully answer the question, will I run out of money in retirement?


The answer to these questions can be found in the “Swiss army knife”  of all retirement planning readiness gauges, THE FUNDED RATIO.

Funded Ratio


The funded ratio describes the degree to which your total assets are able to satisfy not only your total liabilities, but also your future liabilities. A ratio greater than one indicates that you’ll have more than enough money to pay for your future retirement expenses. The larger the number the better. A ratio less than one indicates that you are not in as good a situation as you should be when you retire and you run the risk of retirement failure = running out of money before you run out of time.

For example, let’s take a baby boomer couple ages 65 and 62 with an investment portfolio of $1.3 million dollars, a house worth $600k, and future lifetime Social Security and pension payments of $1.8 million.The present value of these assets is $3.7 million. The only debt the couple has is their $200k mortgage, but the present value of all of their future income tax and medical care costs for the next 30 plus years is $2.6 million. The present value of all of their future discretionary and non discretionary expenses for the next 30 years is $1.4 million. Adding those together gives us the present value of all of their future liabilities in today’s dollars,  $4 million.

Their Funded Ratio is:


Present Value of assets: $3.7 million / Present value of liabilities $4 million = .93


They are 93% “fully funded” for their retirement. Definitely not as good as you would like it to be, especially for someone with no debt (except for the mortgage) and $1.3 million in the bank.


The Household Balance Sheet—the key to understanding and improving the funded ratio.


The funded ratio is not a new concept, large insurance companies and defined-benefit pension plans have been using it for decades. It is a measure of the companies assets divided by it’s liabilities. A pension plan administrator knows that they’ll have future liability payments that then need to make to retirees, so they’ll always monitor their pensions’ funded ratio to make sure that the pension is “fully funded” with a ratio greater than one.How is your retirement funded ratio? Are you fully funded?

To understand how it is comprised, you’ll need to understand what the Household Balance sheet for a retiree is and how it differs from the traditional corporate balance sheet.


Household Balance Sheet

The typical balance sheet shows all of your assets on one side and your liabilities on the other side. Subtract the two, and whatever is left is available to the shareholders, it is the owner’s equity in the company. The Household Balance sheet for a retiree adds up not only your financial assets, the current value of your stocks, bonds, mutual funds, real estate, etc., but it also calculates the present value of all of your expected Social security and pension payments, for the rest of your life, adjusted for inflation. This give you more accurate assessment of your current asset status.

On the liability side, the Household Balance Sheet looks at not only the current debts that you may have (mortgage, credit cards, etc.) but also looks at the present value of all of your future tax payments and healthcare costs. These are two parts of your future liabilities that are grossly overlooked by most financial advisors. Most stockbrokers and financial planners are focused on the asset side of the balance sheet. They want to know how much money you have in invest, and how that can re-allocate your mix of stocks, bonds, and mutual funds to move you along the “efficient frontier.” They are concerned about growing your assets, and when the market decreases in value, you can simply dollar cost average in and buy more shares. There is very little thought put into the liability side of the equation, especially the future liabilities.

With healthcare costs increasing at an average rate of 7.5% per year, and taxes continuing to increase on “affluent baby boomers” (those who have more than $250,000 of assets and receive over $34,000 income in retirement) it is critical that today’s retirees work with a competent retirement income advisor that can help them improve both sides of their retirement household balance sheet to improve their funded ratio.

What steps can you take to improve your funded ratio and to make your retirement more secure?

Here’s a snapshot of their Household Balance sheet of this couple, let’s examine it for ways that it can be improved:


Itemized Houshold Balance Sheet Bill and Susan



The Asset side of the household balance sheet looks at not only their current financial capital, the monies that they have to invest, but also the future present value of all of their pending pension and Social Security payments. Retirees can improve the present values of these two line items by increasing their monthly pension option by taking a lump sum payout and creating their own pension, or taking the higher single life payout and purchasing life insurance with the difference in case of the early death of the pension owner. This way the surviving spouse can have income replacement from the proceeds of the tax free life insurance if the pension owner dies.

Another way to increase the asset side of the balance sheet is to properly optimize Social Security benefits as part of a larger plan. This particular couple was planning on taking Social Security benefits right away, the day after they retire, like most retirees. However by properly using the file and suspend and the restricted application parameters for the Social Security program, we can increase the Present Value of their Social Security benefits by over $300,000 to $1.6 million. This change alone brings them up to a funded ratio of 100%.

On the liability side of the balance sheet, the two easiest things to improve is the amount you have to pay in taxes over your lifetime and your future health care costs. Tax liability can be improved by reducing  the amount of your Social Security that will be included in your taxable income. Currently, up to 85% of a retirees SS income could be included in their taxable income if they make more than $34,000/year. Also, if a retiree has too high of an adjusted gross income then their Medicare Part B premium payments could increase by over 500%.

For this couple, because they had so much in IRA monies, it was creating a tax time bomb for them once they hit 70.5. By engaging in some proactive ROTH conversions between now and age 70 they were able to dramatically reduce the cost of insurance.

Success! Please call if you have any questions! 303-734-7078


Dave Anthony, CFP

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