Well done, ladies and gentlemen.
Yes, I'm talking to you -- you owners of MGM Mirage
Those stocks have been jaw-dropping investments, doubling or more over the past 12 months. So nice work! But while you're throwing back the bubbly and trying to stay on top of the market, let me ask you:
- Given the value of your entire portfolio -- not just your market-crushing picks -- when will you be able to retire?
- How much income would your portfolio produce in 10 years? Twenty? Tomorrow?
- Given that you'll have to sell investments to pay your retirement bills, how do you know your portfolio will last as long as you do?
- How will you keep taxes from devouring your gains when you do sell?
Earning great returns on your stocks is just one part of the picture. Unless you're investing for the fun of it, at some point you're going to want to convert those returns into cash -- whether to buy that vacation home, that education for a kid or grandkid, or just to pay the bills in retirement. And you must know now whether enough money will be there, and the smartest way to access it.
Run your numbers
Knowing whether you'll have enough to do all you want isn't something you can figure out by scribbling some numbers on a napkin. You need something that will factor in all the moving parts of any financial plan -- salary increases, bigger contribution limits to retirement accounts, taxes, Social Security (if it'll be there and what will happen if it's not), pension income, and tapping home equity.
No, for all that, you'll need some heavy computing power. You can start by checking out some of the free financial calculators on the Internet. That's a good first step.
Unfortunately, as with many things in life, you get what you pay for; many of these calculators don't factor in everything that goes into determining whether you'll have a retirement of abundance or subsistence. Go ahead and try three calculators; you'll get three different answers (probably very different answers).
That's why we offer a far more sophisticated financial-planning tool as part of my Rule Your Retirement service. It considers all the important determinants of your financial future, and allows users to change the underlying assumptions to analyze various "what if" scenarios. And, unlike the standard retirement calculator, it saves your information, so a plan can be updated often. (You can give it a try with a 30-day free trial of Rule Your Retirement.)
You need a plan
Whether you give our tool a try or not, you absolutely must determine if you're on track. Try a bunch of retirement calculators and average out the results. Develop a spreadsheet. Use any tools offered by your broker or financial software, such as Intuit's Quicken or Microsoft Money. That will put you ahead of the vast majority of Americans, since study after study has shown that the average U.S. worker has no clue how much he'll need to achieve his financial goals.
Next, decide what you'll do about those outstanding investments. You're a smart investor, so I don't need to tell you that outstanding investments don't always stay outstanding.
While some stocks have doubled over the past year, others -- such as Rackable Systems
So while you should revel in your market-spanking picks from the past year, that's just one part of your current net worth, at one point in time. Knowing what your future net worth will look like when you want to spend it is the way to make sure your investments really pay off.
In other words, you must have a plan.
This article was originally published on Feb. 20, 2007. It has been updated.
Robert Brokamp is the editor of the Motley Fool Rule Your Retirement service. Take a 30-day free trial by clicking here -- and get a plan. Robert does not own any of the companies discussed in this article. MasterCard and Microsoft are Inside Value recommendations. The Fool has a disclosure policy.