*bobcat2*on the Funding Ratio. I really liked how this one metric could be used to assess Retirement Readiness and help model Asset Allocation. While I thought the thread was interesting, I was a bit put off by using an

*Immediate Annuity*to help drive the calculations. No doubt this could be useful but I was really looking for a metric I could seamlessly calculate as part of my Retirement Cashflow Model. I already had a projection of my Income, Expenses and Taxes throughout Retirement and really wanted a simple way to signal if I was on-track or needed to adjust.

I would like to use this post to start a discussion on using a variation of this metric which I am calling the

*Retirement Readiness Ratio (RRR)*.

**Proposed Metric:**

*Retirement Readiness Ratio = Current Portfolio Value/PV(DiscountRate, (Income-(Expenses+Taxes))*

Essentially this is a ratio of the Current Portfolio Value to the currently valued Cashflow needs throughout Retirement. I see this as

*one of many signpost metrics*I can use before or during retirement to gauge my readiness and provide some insights around the question of how much risk do I need to take.

In my mind it is a much better metric than some of the other frequently discussed metrics

*e.g. 25x times expenses*since it accounts for the

*Income*as well as

*Expense*and isn't tied to an assumed Retirement duration (

*e.g. 30 years*).

Link to Retirement Readiness Ratio Spreadsheet

**Key Questions:**

1. Is this a useful Ratio to use? By whom? At what point in their planning?

2. Am I making a reasonable assumption that BHs interested in Retirement planning would have the Inputs and Cashflow Model?

2. What are the key insights we can gain from the Ratio? What have I missed?

3. Is the fundamental logic correct?

4. What gradations in the RRR need to be better understood? For instance, I don't think the step function implemented works well when the RRR ratio is between .9 and 1.1.

5. What needs to be clarified to make this useful to the BH community?

My thinking is that this RRR Ratio is useful as a

*point-in-time signpos*t to quickly assess the over all health of the Retirement Plan. Many things can happen in the future that may change things -- but for today we can make an assessment. I think RRR would be useful closer in the

*range*of <Retirement - 10 Years> to <End of Life>.

Thanks in Advance for your Insights and Suggestions!

**Insights Provided by the Model:**

*Retirement Readiness Ratio*

RRR Ratio under 1 --

**Not Ready,**continue Saving, Increase Retirement Income or Decrease ExpensesRRR Ratio between 1 and 2 --

**Ready but Monitor**enjoy retirementRRR Ratio greater than 2 --

**In Excellent Shape**for Retirement, relax*Present Value of Cashflows*

PV of Cashflows > 0 –-

*.*

**In Excellent Shape**for Retirement

**Portfolio NOT even needed**to fund expenses*Equity Allocation*

Suggested Maximum Equity Allocation -- Assuming that Equities can drop by the percentage provided, what is the highest equity allocation I can use and not go below a RRR Ratio of 1.

Maximum Suggested Equity Allocation < Minimum Portfolio Equity Allocation –-

**Monitor**Retirement closely your Equity Portfolio may not keep up with inflation.*Funding Ratio -- Alternative Analysis*

Suggested Monthly Immediate Annuity and COLA to price if using the traditional Funding Ratio approach

Not enough money in Portfolio to Purchase Immediate Annuity --

*There is not enough money in the Portfolio to Purchase an Immediate Annuity to meet Cashflow needs*

**Inputs:**

**Cashflow Model**

**Insights:**

**Alternative Analysis -- Traditional Funding Ratio**