HHBS is short for Household Balance SheetBasically, this is the same actuarial funding approach that large retirement plans use to save for their future pension benefit payments. We're applying the same principles at the household level for personal retirement planning.
Current Financial Assets savings categoryThe current value of all your IRAs, 401ks, 403b, 457, brokerage accounts, trusts and bank accounts. Basically, any investment account where the holdings are priced daily and can be liquidated easily at a fair market value.
Current Real Assets savings categoryThese household assets include your home, rental property, private businesses, partnerships, oil & gas leases, collectibles, hard currency, gold, etc. We're looking for the net liquidation value (after taxes and transaction fees) of these assets if you had to sell them within 30 days.
Future Savings asset categoryThis is your absolute pre-retirement commitment to future contributions to your IRA, 401k, 403b, 457 and taxable savings to fund future retirement expenses. This also includes the present value of any future inheritance you are certain that you will be receiving.
We'll also record "contingency" future savings items that may or may not be realized like uncertain inheritance and term insurance death benefits, then create a matching expense under Legacy to prevent the contingency future savings from being included in the funded ratio calculation.
Pension Income asset categoryThese household assets include private and public pensions, annuities, whole life insurance, individual government bond ladders, etc. Essentially, these cash flow types have some form of third-party guarantee.
Guaranteed Income asset categoryThis is primarily your Social Security benefit income, guaranteed by the US government.
Lifestyle Living Expenses cost categoryThese are your anticipated discretionary living expenses in retirement, like vacations, restaurants, entertainment, hobbies, gym memberships, etc. Basically, it's stuff you could live without in a pinch.
Education & Legacy cost categoryThese household expenses include college, private school, special legacy projects, charity and bequests paid in retirement.
Tax Expenses cost categoryThese include your annual federal, state, local, estate and property taxes (if applicable) paid in retirement. These are the tax items reported on your federal 1040 form and equivalent state tax form.
Medical Expenses cost categoryThese include all healthcare-related expenses in retirement including insurance premiums, out-of-pocket healthcare payments, pharmacy, in-home care, long-term care insurance, etc.
Essential Living Expenses cost categoryThese include food, shelter, clothing, transportation, etc. less medical and taxes which we track separately but are essential retirement expenses too!
What is Financial Capital?Financial Capital refers to your personal assets that can be liquidated to cash at fair market value in a reasonable time period, usually less than 30 days. These types of assets include your IRAs, brokerage and 401ks investments, and certain real assets like your residence, collectibles, passive partnership investments if applicable.
What is Human Capital?Human Capital includes your ability to generate excess current income to be applied to future savings, like IRA contributions, as well as the future liquidation value of your private business if you are a business owner or entrepreneur.
What is Social Capital?Social Capital covers low risk assets where a third-party guarantees future income streams including Social Security, annuities, Defined Benefit plans and US Treasury or TIPS bond ladders.
What is the Funded Ratio?It's the ratio of balance sheet assets divided by balance sheet liabilities. Think of it as your personal "Am I on track for retirement" yardstick. If that value is greater than 1 (or 100% if using percentages), then you currently have sufficient assets to cover your liabilities. Ideally, we like to see a funded ratio of 1.2 or higher to provide a cushion against unplanned expenses or unexpected declines in asset values.
What does Underfunded mean?If your funded ratio value is less 0.80, then we consider your household underfunded for retirement, requiring that you and your spouse, if applicable, (1) save more, (2) work longer and/or (3) spend less. Ideally, we like to see a funded ratio of 1.2 or higher to provide a cushion against unplanned expenses or unexpected declines in asset values.
What does Constrained mean?If your funded ratio value is between 0.80 and 1.2, then we consider your household almost ready (constrained) for retirement, requiring a thorough review of HHBS assumptions and spending goals. Ideally, we like to see a funded ratio of 1.2 or higher to provide a cushion against unplanned expenses or unexpected declines in asset values.
What does Overfunded mean?If your funded ratio value is greater than 1.2, then your household has reached critical mass and is ready for retirement.
Household Balance Sheet and HHBS are a registered service marks of the Retirement Income Industry Association (RIIA)