What is your power percentage and what does the metric mean in terms of retirement readiness?
“If I were to approach you on the street and ask you how your financial life was going, on what basis would you answer the randomly invasive question?” asks Peter Dunn in a superb piece for usatoday.com. “You can spin your wheels for years and then eventually wander around aimlessly, if you use the wrong metric to evaluate your financial standing. It’s a sneaky problem that doesn’t feel like a problem. You may think you’re doing great, but you’re only doing great by an inadequate metric.” Dunn continues:
“’My dog racked-up a $760 vet bill yesterday, so not so great’, a sullen man in his late twenties answered my question earlier in the year. He’s yet another person who chooses to answer the query based on mood and stress derived from current financial events. While tapping your mood to explore your solvency might seem prudent, it’s way too emotional and subjective to actually matter.
“’I have an 820 point credit score’, one lady answered. Yippee, you’re good at borrowing money. Measuring your financial life based on your credit score is as ridiculous as it is self-defeating. Imagine going to the retirement office (there is no retirement office) when you’re 65 years old and exclaiming “I have an 820-point credit score, now let’s get started with retirement.” You can’t borrow income for a multi-decade retirement. Your credit score, although referenced for auto and home insurance premium rates, becomes increasingly unimportant as you get older
“’My wife and I have a household income of $600,000’, a man offered to me in an airport. Unless these people were creating independence from this income by saving it, this income will create a monumental level of dependency and make retirement very difficult. A high income is not indicative of much, when it comes to financial health. It’s like buying bulk kale. Who cares, unless you’re actually eating it.
“’We have $30,000 in savings’, a very nice lady offers with a smile. Awesome. How’d it get there? Money saved is generally a measure of past circumstance or behavior. Unless she was still actively saving, the savings itself doesn’t mean much.
“Clearly, it appears I’m difficult to please. But I’m not. I simply refuse to let people lie to themselves about their financial reality. This is precisely why I created my own metric – Power Percentage. It measures what you’re doing now to improve your financial life, and how close you are to creating financial independence. Power Percentage also happens to sniff-out lifestyle creep, evaluate your mortgage strategy, and recognizes debt elimination.
“Begin by adding up the following monthly activities: retirement plan deposit, employer match, college fund deposits, savings deposits (which won’t be immediately spent on vacations, holidays, etc.), other investment deposits, HSA contributions (which you don’t have immediate plans to use), mortgage principal payment (not interest, property taxes, or insurance), medical debt payments, credit-card payments (from cards which you’re currently not using), student loan payments (above and beyond interest-only payments), and any other debt in which you are making consistent money payments (except car payments).
“Once you add all of those healthy financial activities up, divide by your gross (pre-tax) monthly income. For example, if you add-up all your monthly activity and arrive at $1,500, and your gross monthly income is $5,000, then your Power Percentage is 30% ($1,500 / $5,000 = .30).
“The Power Percentage scale is as follows. Less than 10%, and you’re in big trouble. You’re way too dependent on your income. Relief is not on the horizon, because you’re not doing anything about it. You are consuming your entire income while not saving money and not paying on debts. If your Power Percentage is between 11% and 20%, you’re doing okay, but your Power Percentage has a long way to go prior to retirement. A Power Percentage of 21% to 34% indicates you’re living a healthy financial lifestyle. And finally, a Power Percentage of 35% or higher proves to you that you’re well on your way to mastering your financial life.
“Once you’ve established your Power Percentage, your goal becomes to increase it every single year until the day you retire. For a complete explanation and exploration of Power Percentage, listen to Episode 120 of my podcast, The Million Dollar Plan.
“No matter your income, your assets, your credit score, or your mood, if your Power Percentage isn’t healthy, neither are you.
“It’s worth noting that using Power Percentage to measure your financial health is only applicable to those who earn a living wage or higher. It’s completely unrealistic and inappropriate to measure your financial health based on a path to income independence when earning below living wage.”