Monday, December 31, 2007

Wealth Builder Ratios - Q4 2007 Update

Here is our Q4 2007 Wealth Builder Ratio update. This update also represents results for the 2007 year. I am very pleased with this year's results versus goals and 2006 results. The second half of 2007 has delivered significantly higher returns versus the first half of this year. As a result, we exceeded our financial goals for 2007. For more details on the relevance of these ratios, please see this How Much Is Needed To Be Wealthy - The NUMBER.

Ratio and Target

Q3 2007

Q4 2007


Income to Salary

Target=0.8 2007 - 0.8


Exceeding the target of 0.8 is due primarily to a 16.7% gain in our company stock, which is a significant part of our retirement account. In addition, since I retired in Q4 this year, I have included the value of stock options for the first time. The impact of stock option returns on the ratio is shown in the parentheses.

Tracking this ratio is giving me an indication of what our income might be like during retirement. With investment income at 9% of my salary for the first half of the year, we would have been spending our retirement principal during Q1 and Q2 2007. However, for the second year in a row, significant gains were achieved in the second half of the year.

to Salary

Target>20 2007 - 16.5

The significant gain this quarter is due to 16.6% rise in my company's stock, the gain in my taxable accounts and a contribution by the company to my retirement account. Of note, we achieved our target of 20.0 this year due to inclusion of stock options in the calculation for the the first time this quarter. This calculation is show in parentheses.

Debt to Salary

Target=0 2007 - 1.53

Currently, our only debt is our home mortgage. In January, we made a payment equal to 4% of our principal. Although our target has been to pay off our mortgage at retirement, we decided to keep the mortgage for at least one to two more years.

My financial goals for 2007 were:

1. Continue to maintain an Investment Income to Salary ratio > 0.8. (exceeded)

2. Add 1.5 to my Savings to Salary Ratio for a year-end value of 16.5. (exceeded)

3. Reduce my Debt to Salary Ratio by 0.1 to 1.53. (done)

(For reference, Salary refers to gross salary.)

Both #1 and #2 were directly correlated with how well our stock, bond, and CD investments did. Due to a strong second half, our stock, bond, and CD investments return 14.6% in 2007. This compares with an S&P return of 3.5% and a Dow return of 6.4% for 2007. Number 3 was achieved since we made an additional payment equal to about 4% of our mortgage principal.

2007 has been a good year financially. However, I don't expect our investments to regularly have double digit returns every year. Our financial situation could change significantly with a downturn in the stock market. While we have met our targets for retirement, our goal now is to meet them in 2008 and later. We will be adjusting our asset allocation, with the help of our financial advisor, to help mitigate market risks going forward.

2008 will be an interesting (and probably volatile) year, given the economic and political uncertainty, and the upcoming Presidential election. Next year will be a good test of the effectiveness of our investment strategies.

For more on Strategies and Plans , check back every Monday for a new segment.

This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

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