A Step-By-Step Guide For Your Annual Financial Update

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Happy New Year!!

For the past 28 years, I’ve conducted an annual financial update every January.  While the topic may not be sexy, I believe it’s one of the most critical steps in your journey to Financial Independence and Retirement.  What gets measured, gets done.

Today, I’ll provide a step-by-step guide to my annual financial update process, including a checklist I’ve developed and numerous links to spreadsheets to help you implement the process.  

Every January for the past 28 years, I've conducted this Annual Financial Update. Today, I provide a step-by-step guide, with links to the spreadsheets I use for my annual review. Click To Tweet

A Step-By-Step Guide to Your Annual Financial Update:  

I’ve refined this process over the years and have found I can update our entire financial picture in approximately 2-3 hours.  Those are some of the most valuable hours I invest in our financial/retirement planning every year.

Following is the step-by-step approach I use.

1. Update Net Worth Statement

The Net Worth Statement is the single most important document in the annual financial update.  It’s the scorecard of your journey toward financial independence, tracking all of your assets and subtracting your liabilities to determine your Net Worth. If you do nothing else, it’s critical that you update your Net Worth statement at the end of every year.

Here’s a screenshot from my free template (using fictitious numbers for example):

annual financial update

A lot of folks are surprised to find that I only update our Net Worth once a year.  Given the long term nature of our investing strategy, I’ve found an annual update is sufficient.  In addition, it makes it a bit exciting to see how your numbers have changed in the past 365 days.

To Do:  Using your existing spreadsheet, or using mine, simply capture all of your 12/31 balances for all of your assets and liabilities.  I used to wait until my statements came in, but I’ve found it’s just as easy to log in to each of our financial accounts online to get the numbers sooner. 

Further Reading:  How Much Fuel Is In Your Tank (my overview of why Net Worth matters).

2. Update Personal Capital / Capture Asset Allocation

As early as possible in the New Year, I log in to Personal Capital (affiliate link), ensure all of my accounts are updated and capture my asset allocation.  I really like the Personal Capital dashboards, and feel this free service is worth putting up with their sales efforts (just say no, they go away after a while). 

It’s critical to understand your current asset allocation, and it’s difficult to do with the variety of mutual funds, 401(k)’s, and other blended accounts we hold.  With the free dashboard, you can easily get a detailed breakdown of your asset allocation.  I capture the data every year-end, including a screen capture from the dashboard:

To Do’s:  Personally, I don’t care if you use Personal Capital, but I DO care that you know your current Asset Allocation.  If you’re aware of other tools to easily capture your asset allocation, please share in the comments.

Further Reading:  Why Is Asset Allocation Important?

3. Determine Portfolio Rebalancing Actions

Once I’ve updated my Asset Allocation, I compare it to my targeted Asset Allocation and determine what actions are required to achieve my Targeted Asset Allocation.  If you’d like more detail on the process I use, read A Simple Guide To Targeted Asset Allocation, which includes a step-by-step description (with screenshots) of my process: 

Actual vs Target Asset Allocation

To Do’s:  Use this spreadsheet to compare your current asset allocation to your targeted asset allocation and determine what rebalancing actions you need to complete over the coming months.

Further Reading:  A Simple Guide To Targeted Asset Allocation

Until my retirement, those three steps were the core of my annual financial update.  In addition, you should annually review your estate documents, your “Love Letter” (which includes all the details your spouse will need in the event of an emergency), and other items identified in The Annual Financial Update Checklist.

Retirement Items For Your Annual Financial Update

For those of you approaching, or already in, retirement, there are a few extra steps you should conduct as part of your annual financial update.

If you're in retirement, make sure you include these steps in your Annual Financial Update. Click To Tweet

4. Update Your Bucket Status

If you’re using The Bucket Strategy (my most-read post, ever!) to fund your retirement expenses, updating your bucket status is a critical part of your annual financial update.  Using the “Bucket Details” tab in this spreadsheet, I link every line item from my Net Worth Statement to its corresponding bucket, as shown:

Since we’ve just updated our Net Worth, it’s time to review your status in each of the “buckets” and refill as required.  Over the past year, I’ve refilled Bucket 1 throughout the year, roughly in line with my spending withdrawals (I will discontinue this practice during the next Bear Market, and drawdown Bucket 1 to mitigate Sequence Of Return Risk).  With the stock market being up this year, I’ve been selling small tranches of equities to keep my Bucket 1 topped off at the “3 years of spending” level.  

To Do’s:  Review your funding level in each of your Buckets, and adjust as required.  If you’re using a different Withdrawal Strategy, make adjustments as required to ensure you’re being consistent with your strategy.

Further Reading:  Seven Strategies To Make Your Money Last Through Retirement

5. Update Your Spending For The Previous Year

Many folks are surprised to learn that my wife and I don’t budget in retirement.  Rather, as I outlined in Our Retirement Drawdown Strategy, we simply spend what we have in our checking account each month.  How, then, do we know what we’ve spent on an annual basis to ensure we’re living within our Safe Withdrawal Rate?

For us, it’s a very simple exercise.  Since we fund all of our spending via an automated transfer from our CapitalOne360 money market account each month, it’s a simple matter of comparing the Jan 1 vs. the Dec 31 balance in the account.   Let’s say we started at $80k and ended at $40k.  Simple math, we spent $40k.  Duh.

In addition, we add any revenue we’ve had during the year which was deposited directly into our checking account.  I track my monthly pension deposits and any other side income in a spreadsheet.  Add the two figures together, and we know how much we’ve spent for the year.  Easy.

It’s relevant to mention that we pay estimated taxes every quarter out of our checking account (along with withholdings from my pension), so my spending spreadsheet captures our living expenses as well as our tax expenses.  It’s important to capture your tax expenses as part of this annual exercise.

To Do’s:  Whether you decide to budget in detail or track on a macro level, you MUST know how much you’re spending each year in retirement to avoid overspending your Safe Withdrawal Rate.  Develop a system if you don’t already have one, and update it as part of your annual financial update.

Further Reading:  Our Retirement Drawdown Strategy

6. Establish Your Spending Limits For The New Year

Within my net worth spreadsheet, I’ve added a subtotal for any account which is available for spending in retirement.  This subtotal excludes things like the value of our home, autos, etc.  Once I’ve captured the total of “spendable assets” (which, by the way, is exactly the same figure as the total of our 3 Buckets), I multiply it by various Safe Withdrawal Rate percentages (3%, 3.5%, and 4%).  The resulting three figures become by spending guardrails for the new year.  If, for example, we had $1M of spendable assets, we could spend anywhere between $30k – $40k from our assets in the coming year.

With this range determined, I compare it to our previous year’s actual spending and adjust our CapitalOne360 automatic transfers, as appropriate.  Once this is in place, we can continue for the next year in spending whatever we have in our checking account without worrying about tracking a detailed budget.  It works well for us, and it’s extremely simple.

I like simple.

To Do’s:  Find a system which works for you, but you must have a mechanism in place to ensure you’ve identified, and live within, a minimum and maximum spending level during retirement.

Further Reading:  How Much Can You Safely Spend In Retirement?

The Annual Financial Update Checklist

To summarize all of the steps outlined in this post, I’ve created a print-ready checklist which you can view here, or by simply clicking on the picture below:

Annual Financial Update checklist

Conclusion

There you have it, the step-by-step detail for how I conduct our Annual Financial Update.  Summarized:

The Annual Financial Update Checklist:

  1. Update Your Net Worth
  2. Capture Your Current Asset Allocation
  3. Determine Portfolio Rebalancing Actions
  4. Update Your Bucket Status
  5. Update Your Spending for the Previous Year
  6. Establish Your Spending Limits for the New Year

Adapt it as you see fit for your personal situation, but I strongly encourage you to conduct your own annual financial update at the beginning of each year.  It’s a great way to ensure that you’re staying on track with your goals, and an excellent opportunity to evaluate the changes you need to make for the coming year.

What About You?  Do you do an annual financial update?  Are there any steps you include that I’ve omitted?  Let’s chat in the comments.

51 comments

  2. Thanks for the post, Fritz, & Happy New Year!

    After hearing people smarter than me tell me for years that I needed to do a Net Worth Statement, I’m doing it, TODAY.

    Excel, here I come!

  3. Thanks Fritz. Good stuff and I appreciate the brevity in your writing to summarize the core concepts.

    Easy to feel smug looking over these numbers after the returns in 2019. I am reminded of the old saw – “Don’t confuse genius with a bull market.”

    The market giveth, and the market will certainly taketh away.
    Happy New Year.

  4. that’s about how we do it in le smidlap chateau, fritz. i’m looking forward to posting our annual misguided returns later this week but the key takeaway that i ask folks to realize has to do with the subtle moves around asset allocation. i love your idea of sending cash reserves towards the high side of your range when markets are raging higher. it forces to work the old warren buffet adage: “we try to be greedy when the public is fearful and fearful when people are greedy.” i think lots of people get wrong the concept of all in or all out. a few percentage point transactions will keep that ballast where it needs to be.

    happy new year, man.

  6. Thanks for this article Fritz. It really ties everything together. I’ve done a net worth statement for years to track our financial progress but since I’ve discovered your blog I’ve created some new spreadsheets that track our investment income on a quarterly basis, and I’ve done the bucket plan for our investments too. We are both 62 and are thinking seriously about taking the leap and retiring at the end of 2020. Thank you for all the effort you put into helping others sort through this process of going from work/save to retire/spend.
    Here’s to a great new year!

  7. Awesome advice, Fritz. I have been doing Net Worth statements the last years. I’m 2 years from retirement but it’s awesome to see the growth we’ve had, especially this past years. Here’s to a prosperous 2020!

  8. Fritz,

    Thanks for the information. I have to admit I like to update my net worth more frequently than annually with the raging bull market and not so much in bearish years. Your advice on tracking spending during retirement years is my big takeaway and realizing the accumulation phase is only part of the journey to a successful retirement! Best to you this year and it should be a big one with your book coming out!

    1. Dusty, I suspect I’m in the minority with “only” checking my Net Worth once per year, but I’ve found that’s all I really need to do to keep things on track. Besides, it makes for a very exciting update when I haven’t looked at the Net Worth for a full year! Drum roll, please….

      And yes, I’m excited about the book and what 2020 has in store, including meeting you at the Chili Cook-Off! Thanks for being a loyal reader of The Retirement Manifesto

  9. Wonderful article and great tool. I’ve sent it to all my relatives.

    Hope you have a Super 2020.

    Bill

  10. Completed net worth and spending per budget category. It’s been a new years day tradition for me since 2001! Thanks for reenforcing the need to do so. I look forward to this every year! Amazing to watch the amounts grow and see the consistency of investing pay off.

  11. Since you asked in the article, I used Fidelity’s Full View instead of Personal Capital. Enter in your non-Fidelity accounts and it automatically imports those positions and provide analysis of your entire portfolio. It also does sector breakdowns for your portfolio.

    1. Great to know, Phillip. Thanks for sharing, and responding to my request for information on alternatives to Personal Capital. I don’t have any accounts with Fidelity (I’m a Vanguard guy, since my employer’s 401(k) is with them and I decided to keep everything in the same place), so I learned something today. Not sure I’m up for entering all of my accounts in their system since I’ve already got Personal Capital set up, but it’s good to know for folks who don’t have something in place.

  12. Groovy annual financial update:

    1. Net worth up $199,627. The market tooketh in 2018 but gaveth a lot in 2019.
    2. Current asset allocation is 54 percent stocks, 46 percent bonds/cash.
    3. We started 2019 with a 47.5/52.5 allocation. Following the rising glide-path approach to asset allocation, our target for 2020 is a 50/50 allocation. We’ll be rebalancing our portfolio accordingly.
    4. All buckets are flush and ready to go for 2020.
    5. We spent $43,583 in 2019.
    6. $4,000 per month. Same as 2019.

    Since I’m a disciple of the Retirement Manifesto teachings, I had these numbers figured out by 9 am this morning–way before I even read this glorious post. Here’s to a smashing 2020, my friend. I’m sure it’s going to be awesome for you and Jackie. Cheers.

    1. I add a couple more items to my financial review. Calculate investment returns for the year. Managed to earn 25.4% in 2019 with 98% stocks, 2% cash.

      I also project how much I can convert from traditional IRA to Roth IRA without breaking out of 24% tax bracket. I will usually wait until the end of the year to do the conversion, since the earnings picture is much clearer by then. But doing an early projection let’s me estimate how much more to keep in the cash bucket for taxes.

      1. I love it, Alan. Our portfolio had a 13 percent return in 2019. Too much money in bonds and cash to hit a 25 percent return. But that was by design, of course. We live in a low-cost state and have a pension to cover half of our living expenses. In other words, our portfolio doesn’t have to do a lot of lifting and we’re determined to play good defense in the first five years of our retirement. We haven’t touched the conversion projection number yet. Right now, because of our Obamacare subsidies, converting traditional IRA money to Roth IRA money doesn’t make sense. The effective tax rate on such conversions would be too prohibitive. But it’s something that should be on our radar five years from now. Thanks for sharing your thoughts. Your two additional review items make a lot of sense. Cheers.

      2. Alan, I do look at our returns for the year, though I simply look at Net Worth % increase year on year. It’s not an accurate “return” figure, since it excludes the impact of any savings or withdrawals, but it’s a good metric to track.

        As you’ll see in my note below to Lara, I also look at our ROTH conversion strategy for the New Year, but I excluded it from the checklist since I don’t actually execute the conversions until Q4, when we have a better feel for actual income and how much room is left in our tax bracket before finalizing the conversion. It is a valid point to add, since it’s critical to have enough liquidity to cover the associated tax obligation. Thanks for the valuable comment!

    2. Why does it not surprise me that you had completed your analysis before I’d even completed this post? You’re amazing, Mr. G! We returned from our Christmas travels on Friday, and I did our annual review on Saturday (that’s also why I’m so late replying to your comment).

      2020 a great year, so I decided to look back to 2018 and view things as a two year result. Our net worth increased an average of 7% per annum over the two-year time frame, and our asset allocation also tilted a bit toward stocks. I’d be ecstatic if we could maintain a 7% return over the course of our retirement, but we’ll have to wait to see what the future holds…

  14. Happy New Year, Fritz! Hope it’s filled with much happiness and enough challenges to keep retirement life interesting.
    I actually do a few more financial task along with your list that in the past two years have been very rewarding.
    1 Tax planning for the maximum Roth Conversions I can do while staying lower than the Medicare income limits (changes every year and DOES Not correlate with income tax brackets) to avoid higher Medicare premiums. This is similar to those limits the younger generation need to watch to maintain Obamacare subsidies but not as income restrictive. Also keep an eye on my state’s income tax brackets and tax changes.
    2. Select which assets from my traditional IRA that I am going to move to my Roth and this is a very important step. I select the highest dividend paying preferred stocks, REITS, losers,(similar to the Dogs of the Dow theory) and very little cash. This makes a larger future tax free income stream that does not get figured into determining how much of your Social Security is taxed. It also dramatically reduces the eventual amount in the traditional IRA when I turn 72 and the government dictates my RMD. Yea !for the SECURE act passed by Senate and signed into law on Dec19, 2019. But cancelling the stretch IRA, not so happy about!
    Last year I did the conversion Jan 3 with the Christmas Eve massacre when all the values were down, a very good choice, but I am going to see what happens this month at least before I convert with the dramatic gains from 2019.
    Finally I calculate 2019 promotional rewards gotten and look at the ones personally offered to me already for 2020.
    Absolutely amazing how much this can put in your coffers.
    And lastly set goals financial and others that impact cash flow for the new year. Sincerely, Lara

    1. Lara, you’re always on top if your investments and retirement planning. Kudos. I should have included the planning I’m now doing for Roth conversions. After I completed the checklist in the post, I did work through my estimated Roth conversions for 2020. However, I typically wait until Q4 to implement the conversion (when I have a better grasp on actual income and location within the tax brackets for the year), so I didn’t include it in my checklist. Like you, I also look at asset allocation and location when doing the Roth conversions, but again I wait to finalize that until I do the actual conversion.

      Thanks for adding good value to the post with your great comment. Much appreciated!

      1. I, like you have way too much in tax deferred accounts – the early option in 401k choices in our careers. But I feel knowing pretty much the guardrails of my regular income -pension, taxable interest and SS income That I know roughly the amount I can do as a Roth conversion. You can always do a second in the fourth quarter. Since I am over 59 1/2 years old the five year rule doesn’t apply. Doing it early – in the beginning of the year has the dividends and capital gains when I sell these assets becoming tax free and decreasing future RMD that impact SS taxation. It also builds up a huge tax free income stream to play tax minimization and income optimization. Also, if I need to pay higher medical cost or long term care it’s there without tax consequences. Lara

    2. Lara – Can you expand on how you determine what to convert from a traditional IRA and the logic behind it. Are there any articles you would recommend reading on the topic. I get it if the market drops that it would be an ideal time to convert, but looking for any rationale you can give me on what to convert i.e. stocks, bonds, REIT’s cash. Thanks Lara

      2. Bruce, Fritz article linked has some great information. If you haven’t read it yet.
        My rationale is to get first my best possible income producers out of my tax deferred accounts where everything is taxed as ordinary income when it is eventually withdrawn, over to my Roth so these become future higher income streams that are tax free. I create a list from highest to lowest income producing first, which probably will include preferred stocks, REITs, dividend stocks, and then if I still need more for the conversion some stocks you think have huge growth potential(Dogs of the Dow theory). I have had to use very little of these. Be aware If you move dividend stocks after their ex-dividend date but before their dividend pay date the dividend goes to the original account. I top off my total taxable income for the year- A little shy of the Medicare income limit To avoid paying supplement Medicare insurance, which is lower then my top tax bracket maximum. As I told Fritz if your married do it before one of you are gone when you can do so much more.
        Since getting my widow pension at 60, I feel I am just returning some of the government money back to them to pay all my taxes owed on the Roth conversions, and it was my tax freedom day. All of our hard earned money, the match, and the earnings transfer to the Roth. The reduced tax brackets is further incentive to do the largest conversion I can now. And the new SECURE act eliminating Stretch IRAs is further incentive to increase my kids legacy by converting now to the Roth. The Roth income stream will be there for future inflation and needs without increasing SS taxation , federal income tax, or my state income tax. Consistently doing it from First full year of retirement instead of waiting till RMD makes more of the earnings grow tax free. I also pay Way less taxes now, then the taxes I saved by putting it in tax deferred during my DH and mine working careers. I do it early in the year so all the dividends and capital gains are tax free for the year in the Roth instead of the government getting 22% plus of them eventually. I wish I could give you specific articles but I read so many sources and my brain peices all the information together and formulates a plan! Hope this helps. Sincerely, Lara

        1. Lara – Thanks for taking the time to respond. The conversion idea makes sense for all kinds of reasons, but I seldom read articles that talk about what assets in a traditional IRA make the most sense to convert. Thanks again for your thoughts, it really helps. I hope you have a great 2020

          1. Bruce, your welcome. Hope 2020 Is great for you as well. I Don’t transfer cash because the dividends and capital gains have routinely thrown off enough cash to invest regularly in my Roth. Lara

  15. Hey Fritz – happy new year and thanks for all the great articles – please keep them coming.

    I really like your approach to number 5. I got that wrong this year (my first full year of no work) by tracking spending almost daily. Too much time thinking about spending just stressed me out and stopped me doing some things I would otherwise have done which was daft because I ended up well within budget. I had already told myself to only look at spend once a month but actually think your approach is better still.

    One other thing I do is update my current withdrawal rate based on the updated market values. In the current market environment this gives me a nice warm feeling but then I give myself a reality check by comparing the income generated from year to year. I fully admit to being both risk adverse and a geek!

    1. PJ, I’m glad my “annual spending” approach was of value to you. I considered doing it “your” way, but I’m glad I decided against it. Retirement is too precious a time to spend it tracking every penny spent, and worrying about your spending as a result. I’ve gotta say, knowing we can just spend whatever is in our checking account brings a huge peace of mind to retirement, without worrying about exceeding our SWR.

      I also look at my withdrawal rate every year when I update our net worth. With the strong market last year, and our 2020 spending planned at the same level as last year, we’ve seen a nice drop in our SWR. Reassuring, given the sequence of return risk all of us face.

      1. I like the “big picture” approach as well. I figure out my spending target for the year. I break that down to a weekly figure. I then transfer a quarter’s worth from my brokerage account to a side account at my bank called “pay day”. Each week i transfer 1 week’s worth into my main checking account which simulates “pay day”. I make a notation in a spreadsheet because occasionally it may not be enough and I take a few dollars from a saving account. Maybe I end up with 6 or so line items in a spreadsheet for the month (one for each week plus some slight shortages if any) . I know I spend everything that goes into the account so at the end of the year I know how much I spent. Much easier than chasing the minutia (sp?).

  17. Thanks for the homework Fritz! Needed to wait a few days before diving in. Glad I did.
    Ps: Nice article about your Wife’s charity. Bet she has a bunch of happy four-legged customers.

    1. I assume you’re talking about my income tracker? It’s really a simple spreadsheet, just horizontal lines for income sources, and months in the columns. You should be able to build something similar in less time than it’d take me to “sanitize” my personal spreadsheet. Have a go, if you’re having problems let me know and I’ll modify my spreadsheet as an additional resource.

  19. Excellent information as always Fritz. I also do the net worth and allocation yearly but I hadn’t thought about the bucket update in retirement. Thanks for the tip.

  21. Pingback: How To Manage The Bucket Strategy - The Retirement Manifesto

  22. I look at net worth every morning when I open Quicken. There I can easily discern what assets are retirement accounts and which cars, home, and other. As for knowing my asset allocation, that too is as simple as opening Portfolio Watch in my Vanguard account. Since there’s a section in Vanguard software to list assets held at other institutions, once they are entered, Portfolio Watch distributes them to the appropriate asset class as easily as assets held in Vanguard.

  23. Hi Fritz,

    I have been using Personal Capital’s on line tools for a couple months now and really like them..one question I have is that when I look at my Current Asset Allocation, Personal Capital is saying that I have 21% of my assets in Alternatives…all of my accounts are either IRA or 401k accounts invested in Mutual funds…a large amount in Index funds….what are they referring to in my assets?

    1. Frank, you can click on the “Alternatives” slice of the stacked bar in your PC dashboard to drill down and see what in contains. I suspect some of your mutual funds hold asset classes which PC considers alternatives (e.g., commodities, precious metals, REITS), but you’ll have to look into the detail to see exactly what they’re counting. Hope that helps!

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