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About the Checkup

THE TWO-MINUTE CHECKUP is designed to give users a quick assessment of their finances based on just nine pieces of information, the sort of things most of us know off the top of our heads. There’s no need for users to link their financial accounts, and their personal data aren’t saved on HumbleDollar or anywhere else.

The Checkup started as an Excel spreadsheet built in 2017 by Derek Mayer and HumbleDollar’s editor, Jonathan Clements, for a business venture that never got off the ground. It sat unused until 2022, when Sanjib Saha, a HumbleDollar contributor and software engineer, offered to turn it into a piece of software. James Heaney, the site’s web developer, added the final touches.

A calculator like this is only as good as the assumptions it makes and the logic it uses—and, for some folks, those assumptions and that logic may make no sense. Still, the hope is that the Two-Minute Checkup will provide most users with a slew of helpful feedback in return for inputting minimal information. Here’s a detailed look at how those suggestions are generated:

Financial Fitness. This feedback should be most helpful to users who are still in the workforce. They’re assessed based on the total value of their financial accounts, minus nonmortgage debt, relative to their household’s earned income, meaning the salary or wages from their job. The earned income you input should be your pretax earnings, while financial accounts should include 401(k)s, IRAs, taxable brokerage accounts, bank accounts and so on, unless the money is earmarked for others, such as the funds intended to pay for the kids’ college costs.

What about mortgage debt? That’s obviously important—but it’s ignored in assessing financial fitness on the assumption that mortgage borrowers own a home of equal or greater value, and thus this debt is offset by a significant asset.

Based on users’ financial wealth relative to their income, the Checkup calculates what percentage of their earned income they’ll be able to replace with portfolio withdrawals as of age 65, assuming users continue to amass wealth at the same rate they have in the past.  The calculation also assumes that, upon retirement, folks adopt a 4% portfolio withdrawal rate.

Spending. Those who are employed are advised to keep their fixed living costs to 50% of pretax monthly income. Retirees who are age 51 or older are advised to use a 4% or 5% portfolio withdrawal rate. Meanwhile, retirees 50 or younger are suggested a 3% withdrawal rate, reflecting their longer expected retirement.

Investing. The recommended stock allocation falls as a user’s age rises. The allocation is expressed as a range that can be as broad as 20 percentage points—an acknowledgment that personal risk tolerance varies considerably. For instance, at age 64, the suggested range is 50% to 70% stocks. For ages 65 and above, no specific stock recommendation is offered because of the wide disparity in risk tolerance among seniors.

Borrowing. Those who are age 50 or younger, and who are also employed, are advised to limit monthly nonmortgage debt payments to 8% of pretax earned income. This 8% is based on the difference between mortgage lenders’ 28% front-end ratio and the 36% back-end ratio. (See “House,” below.) Meanwhile, if folks are age 51 or older, or if they’re retired or unemployed, they’re encouraged to pay down debt.

House. The calculation assumes a 30-year fixed-rate mortgage at the prevailing interest rate. Mortgage lenders typically assess a household’s ability to borrow using a 28% front-end ratio and a 36% back-end ratio. The 28% ratio only looks at the total mortgage payment—including principal, interest, property taxes and homeowner’s insurance—relative to household income, while the 36% ratio also factors in payments on nonmortgage debt.

To come up with a suggested sum that users might qualify to borrow, the Checkup makes two assumptions. First, it assumes property taxes and homeowner’s insurance premiums will devour 6% of household income, so—if we’re only considering the principal-and-interest payments that a lender might allow—the front-end ratio would be 22% and the back-end ratio would be 30%.

Second, the Checkup assumes nonmortgage debt is incurring a 7% interest rate and being paid down over 10 years. That might be a reasonable assumption if someone has a mix of auto, education and credit card debt. But if someone has lots of high-interest credit-card debt, the Checkup’s assumption could be badly wrong. Based on the 7% interest rate and a 10-year paydown period, those with substantial nonmortgage debt may find the 30% back-end ratio comes into play—and thus the maximum size of a potential mortgage that’s suggested by the Checkup may be less than if only the 22% front-end ratio applied.

College. The college savings recommendations assume those with household incomes of $50,000 or less will receive ample financial aid, those with earned incomes above $50,000 but below $150,001 may get some, and those with household incomes of $150,001 and above will likely get none. These figures will be used for 2022. In subsequent years, to adjust for inflation, the numbers will rise 3% annually. Note that the calculator considers income only and ignores assets. If a family has a large amount of savings, especially in taxable accounts, that could nix all chance of financial aid.

Retirement. The suggested retirement nest egg is based on a 4% withdrawal rate and a goal of replicating half of current household income. That suggested nest egg works out to 12.5 times income. The assumption is that all savings will earn a 4% real (after-inflation) return. This should be a reasonable estimate for those who own a balanced mix of stocks and bonds, but it’ll be too optimistic for those who heavily favor bonds and cash investments.

Financial Emergencies. The recommended emergency fund is based on the risk of losing your job. For those who are working, it’s assumed they need three months of spending money in their emergency fund if their job situation is stable and six months’ worth if their job situation is iffy. It’s also assumed that folks can live off 60% of their pretax income. This works out to 0.15 times pretax annual income for those with stable jobs and 0.3 times annual income for those with iffy employment situations. For couples, the recommended emergency fund is a blend of these two numbers. What if someone is retired? The calculator has a standard $15,000 emergency fund recommendation. This dollar number, set for 2022, will rise in $5,000 increments in subsequent years based on a 3% inflation rate.

Insurance. Disability insurance is recommended for those who are employed. Life insurance is suggested for those who are working and have a spouse, and also for those who have children age 21 and younger. Long-term-care insurance is suggested for those age 51 and older. But these recommendations disappear if your total savings and investments, minus nonmortgage debt, are more than $1.5 million in 2022. In subsequent years, the $1.5 million threshold will rise by 3% to adjust for inflation. The assumption: At that level of wealth, self-insuring is an option. For those worth $1.5 million or more, however, there is one insurance suggestion: Get an umbrella-liability policy.

Estate Planning. All users are advised to get a will, and to check that they have the right beneficiaries on their retirement accounts and life insurance. If they have children age 21 or younger, they’re also advised to name a guardian in their will. In addition, for those age 51 and older, it’s suggested that they draw up powers of attorney.

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Jack Hannam
Jack Hannam
3 months ago

I found your advice in the Guide about portfolio withdrawals, 4% rule, sequence of returns risk, safety net and varying spending in retirement to be particularly useful. To estimate my annual cash flow needed in retirement, I tracked my total annual spending for several years prior to retiring four years ago, and adjusted that amount to include medicare and supplemental policy premiums, along with a few other modest employee paid benefits I would lose. There really were no costs to delete, apart from the occasional necktie. I estimated the pretax amount which I would need to withdraw from savings each year, which when combined with our social security benefit, would provide enough cash after taxes. I multiplied this pretax withdrawal amount by a suitable multiple, which yielded my “Number”.

You have already covered the mechanics of taking 4 to 5% of portfolio value in annual distributions very nicely, both in the guide and blog, but I wonder if you would consider another article on the topic. You could contrast the relative convenience of a predictable dollar amount of the annual inflation adjusted withdrawals one could expect following the well known “4% Rule”, compared to the potentially volatile cash flow if instead taking an annual 4-5% of portfolio value. The convenience enjoyed by the former person comes at a cost. If the latter person has the flexibility to manage a more volatile income stream, he will likely receive a larger cumulative distribution, and more importantly, will not incur the risk of portfolio depletion if he lives to a ripe old age. And, provided he keeps a sufficient “cash cushion”, could probably allocate a larger amount to stocks. As for equating stock price volatility with risk, I suspect that using the traditional 4% method converts that volatility to risk of portfolio depletion, whereas the user of your 4-5% annual method bears that risk in the form of a volatile cash stream, but portfolio survival is not placed at risk.

I appreciate the various folks who weigh in with questions or comments, the numerous contributors, and especially yourself. I sometimes type and retype a brief thought or question, several times, so I can only imagine how much time and energy you must have spent on this project. Thank you Jonathan!

deedubs
deedubs
3 months ago
Reply to  Jack Hannam

You might want to check out the work of Wade Pfau. He’s done lots of analysis comparing various withdrawal strategies, all very quantitative but all cognizant of the various risks and assumptions needed.

Jack Hannam
Jack Hannam
3 months ago
Reply to  deedubs

Thanks for the tip, deedubs. I have read some of Pfau’s ideas on glide paths, but not specifically about distributions, which I found both useful and interesting. I have never read any specific advice from Warren Buffett on distribution strategy, but in a couple of his annual letters, I inferred what he might advise. One dealt with, not merely the preservation but indeed growth, of his portfolio valuation despite annually donating a fixed percentage of shares. In the other, he addressed the desire of some shareholders for an annual dividend, and explained how they could instead simply sell a fixed percentage of shares owned each year to accomplish the same thing. The value of the annually donated or sold shares fluctuates of course, but with a long term bias toward increasing.

I think the fundamental question each retiree should address is whether he or she prefers a predictable annual cash figure, or is able to accept a variable annual amount. It seems to me that the sequence of returns risk threatens long term portfolio survival for the first investor. For the second investor, the result is a volatile cash stream.

In order to mitigate the risk, the first investor must downshift away from equities and into bonds well before retirement, but eventually ramp the equities back up again, following a glide path, as Pfau and others have suggested.

The second investor relies on a suitable cash cushion and flexibility in managing a variable cash stream. This strategy permits holding a larger stock allocation, with an expected better long term portfolio performance. The key of course is the necessary flexibility to be able to cope with a few consecutive bad years.

I will read more of what Pfau has written, as you suggested.

deedubs
deedubs
3 months ago

Overall a useful tool, thanks.
I think the spending suggestions – 4 – 5% of assets is too high. Those work for historical data but as we know, we don’t drive looking backwards. In todays environment of high stock prices and low bond yeilds (though getting better!), I personally am using <3% annual spend rate of assets, with a 50/50 balance equity/bond. So my suggestion is to be a bit more conservative in your recommendations. Or add the caveat that your 4% recommendation is based on a 50% probability of running out of money before you die (or whatever the correct figure is).

Raymond D'Hollander
Raymond D'Hollander
3 months ago

This is a very useful tool for a quick check-up.

I made two tweaks to my inputs that you may want to consider putting into the instructions.

  1. I subtracted 401k/403b contributions from our gross salaries. With catch-up contributions after age 50, this can be a large deduction from salary that is not available for spending during our working life. Because of these deductions, our net current disposable income is substantially less than gross income minus taxes. Both the income and deduction will vanish at retirement, so it will be like they never existed in determining standard of living. I think our actual post-401k deduction disposable income is a more appropriate target for future income.
  2. I made a rough estimate of the current accrued financial value of spouse’s pension and added that to the financial assets (I just assumed asset value equivalent to an annuity with an annual payout of 6% of lump sum SPIA, so 16.6x annual pension estimate if leaving job today). This added value would rise over time while working as more years of employment accrue more future pension annual income. Since the calculator assumes 4%-5% withdrawals from a portfolio, the logic of the 6% SPIA payout needs to be thought through a bit to see if that is the right number, but I think it is close due to differences of portfolio future investment returns with inflation versus pension fixed income. I think this simple input tweak addresses one of the common comments.

I did not factor in Social Security because my understanding is that the estimate of required assets already factors in future Social Security income supplementing income from assets.

Once I made these two simple tweaks, I felt that the calculator produced an accurate assessment of our financial position whereas initially it was too pessimistic in my opinion.

Last edited 3 months ago by Raymond D'Hollander
Pete Tittl
Pete Tittl
3 months ago

I wish it included whether you are in a defined benefit pension plan (few are, but it’s important) and what the Social Security benefit and start age plans are….

OldITGuy
OldITGuy
3 months ago

I think the tool is a great addition to the web site. I do like it’s simplicity, but it may be too simple so I have a suggestion that I suspect you already considered when you built the tool. I would recommend adding a mortgage field to indicate if they’re renting or buying, and if buying, the amount of equity in their home. I’d also suggest adding a field for their current monthly contributions to their retirement accounts. My reasoning is that by excluding the home equity factor, the tool doesn’t credit someone who’s made significant progress in paying off their home, even though living rent free in retirement is a huge boost to someone’s status in being financially ready for retirement. I have a total of 13 nieces, nephews, and children, 9 of whom own their own homes outright. But the tool shows several of them as “behind” in their savings. Hence the tool isn’t particularly useful for a person who chose to focus on paying off their house and is now directing the freed up funds into retirement accounts. The defaults for the new fields could be set for people who are renting and hence not necessarily needed to be filled in. Although I do appreciate the desire to keep the tool simple and as I said above I do think it’s a great addition to the web site.

OldITGuy
OldITGuy
3 months ago

Looking at it again, I had a thought that (I think) would address my comment above without adding unduly to the complexity of the tool. I wonder if the field labeled “financial accounts” shouldn’t be relabeled “net worth”. Then it would more accurately reflect any non-financial account assets such at home equity, income property, etc that the person owned. This might allow the tool to more accurately reflect a persons progress in preparing for retirement. Just a thought.

Boomerst3
Boomerst3
3 months ago

I used it and it is pretty good. I am retired, and some of the results/comments weren’t exactly spot on, but it is probably great for those who are younger and still working. For example, it told me because I am not working and have no income (it doesn’t allow for income if you check off retired), I could probably not get a mortgage. It didn’t take into consideration the size of my savings, which would allow me to get a mortgage.

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