Perhaps you'd like to retire someday, but you work for a company like UAL (NASDAQ:UAUA) or IBM (NYSE:IBM), where the pension you had been expecting has permanently shrunk. As a result, you now find yourself thrust into the position of actively managing your own nest egg. Or maybe you're already enjoying the residual rewards of your prosperous career, and you want to make sure that your money lasts at least as long as you do. Either way, you need to know how your retirement investments are performing to ensure that you're on target to meet your goals and needs.

Tracking your performance matters, even if you're primarily an index investor with your cash in vehicles such as the Vanguard Total Stock Market (AMEX:VTI) or the SPDRs (AMEX:SPY). Despite the market's long-run growth, such performance happens in fits and starts. There are multi-year periods where you may tread water or even lose ground. Your ability to retire is probably based on hitting a certain real-money investing target. Without a good tracking mechanism in place, you'll never know how far your actual portfolio is straying from the path needed to reach your goals.

The more you know
As important as it is to monitor your financial performance, the task can be a bit daunting. Manually figuring out how well your money performed requires more than simply comparing where you started with where you finished. If you've either added money to your accounts to feather your nest egg for your golden years, or pulled cash out to support your lifestyle, the math can get quite cumbersome. In all honesty, with enough transactions, it can get downright nasty.

The potential difficulty shouldn't dissuade you from keeping track of how your money is doing. In fact, if you want to make sure your cash lasts at least as long as you do, it's downright critical. Remember the Beardstown Ladies investment club? Those formerly famous women got into trouble because they miscalculated their investing performance. Their problem was at least partially due to confusing their new investments with the growth in their existing portfolio.

They were embarrassed by their mistake, of course. If you do that to yourself, however, the consequences could be much worse. You run the very real risk of thinking that your cash is growing faster than it really is, only to wind up short when you really need the money.

How it works
Imagine you started last year with $10,000 invested and then finished the year with $8,375. Did you make or lose money? How much?

I'll wait while you do the math.

OK, I confess -- that was a trick question. If you caught it, go to the head of the class! The truth is that I haven't given you enough data to come up with the answer. Would you believe that your investments may have made money, even without Enron-style accounting? Take a look at this table, borrowed from a recent issue of Motley Fool Rule Your Retirement to see how that could have happened:


Cash Flow




Starting Balance















New Air Conditioner





















Holiday shopping



Ending Balance

Rate of Return:


Because of the new money added and existing money withdrawn, the real answer is not as simple as it appears on the surface. To get to the details of how that return was calculated, and how to simplify tracking for yourself, read the original article from Rule Your Retirement. Not yet a member? Click here to start your 30-day free trial and get full access to this and every other tip, strategy, and feature in the newsletter.

If you don't know how your investments are doing, you'll never be able to figure out whether or not you're on track. If you happen to be off track, the earlier you can find out and make the appropriate adjustments, the easier those fixes will be. On the flip side, consider what happens if you discover you're ahead of schedule. You just might be able to retire early, even if you shift more of your money into more conservative offerings like the Lehman TIPS Bond Fund (NYSE:TIP) or Vanguard Short-Term Bond Index (FUND:VBISX).

The Foolish bottom line
Preparing for your perfect retirement requires a solid understanding of where you are, where you need to be, and how well you're moving along the path. The sooner you can get a handle on how well your investments are really performing, the easier your future planning and adjustments will be.

Performance tracking is just one of the many aspects of retirement planning that Fool editor Robert Brokamp features in his Rule Your Retirement service. Click here to start building a successful roadmap for your future.

At the time of publication, Fool contributor Chuck Saletta had no ownership stake in any of the companies mentioned in this article. The Fool has a disclosure policy.