Format for printing

If you already filled in your financial statements, take a bow. If not, don't despair. Just, as they say, do it. You're going to need to enter this info, no matter what online calculator or financial software package you use to plan for your retirement.

Let's use some hypothetical data to show what these documents mean. Another browser will open up (poof!) when you click the links so that you can read the lesson and look at the statements at the same time.

To ensure we're all looking at the same data, we'll use as our example the financial statements prepared by our hypothetical couple, Josh and Millicent (you'll find them in the next section). 

I Own, I Owe, It's Off To Work I Go
First, let's look at Josh and Millicent's Net Worth Statement. Remember that this is good ol' Josh and Millicent's private financial data, so keep this kinda confidential, OK? (We give an update on their endlessly fascinating personal lives in the homework assignment below.) The fact that the net worth is positive indicates they own more than they owe, so bankruptcy is probably not in their immediate future.

Now look at Josh and Millicent's Cash Flow Statement. This is the document they will use to refine their estimate of what their retirement will cost. Notice that we list all sources of income at the top, and total them up. We then list all of their expenses. And what do you see as the very first expense? That's right, Fool, it's "Savings," with a big capital S. That's because, while still working, Fools believe in paying ourselves first. Thus, we treat savings as a bill, and it's the very first one we pay. But notice when we retire that expense disappears -- we're more likely to take money from, rather than put money into, savings.

Once all expenses have been listed, they are totaled up, and then subtracted from income. That simple mathematical procedure will produce one of three results (well, four, if you count "breaking out in hives").

1. A negative number, which means expenses exceed income. In that case, you must increase income, decrease expenses, or a combination of the two. A failure to take action will result in a financial disaster. This is not the news anyone wants to hear, but remember -- it's better to open your eyes and look at the oncoming train than just to let it hit you. Note that Josh and Millicent do not fall into this category.
   
   
2. A positive number, which means income exceeds expenses. In that case, you've gotta spend and/or save more. Now, that may sound strange, but if you've got more money coming in, then all we're saying here is that you need to account for it. It's probably already going into savings, right? You're transferring it into your discount brokerage account and investing it wisely, right? That's all -- just make sure to indicate that the funds are accounted for. Note that Josh and Millicent do not fall into this category, either.
   
   
3. A result of zero. That means expenses exactly match income. If that's the case, then you're fine financially, but you should keep a close eye on expenses to ensure you don't end up in a negative cash flow situation. This is the situation that matches our couple. Josh and Millicent have accounted for each dollar of income in their estimated expenses. Accordingly, while they estimate they will have sufficient income in retirement, they must still be prepared to adjust their expenses should those exceed their estimated income.
   
   
4. You break out in hives. Apply cream.