Are you financially closer to retirement than you were at this time last year? Answering this question can help you monitor your saving and investing progress and provides information that you can act on. Here are some suggestions for tracking your yearly progress toward retirement.

1. Has your net worth increased? Your net worth is a number that provides a big picture indication of your financial progress. Ideally, as you approach retirement, your debts are decreasing, your retirement investments are increasing in value, and your other assets are not dragging you down. If your yearly change in net worth is positive, good for you. If it is not or if you don’t know, it is time to take a serious look at your current spending and your retirement plan.

2. Has your yearly spending declined? Some experts say you should plan on spending as much or more in retirement as you do now. But when you stop working for income, your investing and saving expenses will decrease. Beyond that, there can and perhaps should be a general downsizing of other expenses, including housing, taxes, and discretionary costs that can be reduced through financial discipline. Do you really need a land line phone or a smart phone data plan? Will watching every premium movie channel ever invented boost retirement contentment? There are many ways to decrease your annual spending and starting now will get you closer to your retirement finish line.

3. Has your predicted retirement income increased? Being financially ready to retire means you are able to produce a retirement income that will support you and your spouse for the rest of your life. If the reason you are not retired now is that you cannot pass this test, then you must track your annual progress towards this goal. This is not as difficult as it seems. The first step is to estimate your Social Security retirement benefits using your annual Social Security statement or the SSA online estimator tool. If you will have pension income, include that predicted benefit level as well. Then, add up the total current value of all of your retirement assets including stocks, bonds, CDs, and even your home equity if you will downsize. Plug that total number into an annuity calculator, as if you were buying a life income annuity today with your entire retirement nest egg. Add up your predicted Social Security, pension, and annuity payments. Has that predicted income level increased compared to last year? If so, you are making progress.

Additionally, here are reasons paying off a mortgage is important for most retirees.

Tax flexibility. A good retirement income plan allows the retiree to effectively manage his or her income tax burden. This includes minimizing the retiree’s marginal tax rate and the tax implications of receiving Social Security benefits and other income. This is much easier to do if the retiree is not making a mortgage payment. Consider that your home provides shelter services to you every month. You receive these shelter and transportation services tax free if you own your home. On the other hand, if you have mortgage payments, you need income to make those payments. Unless all of your retirement income is non-taxable, taking income to make debt payments will increase your tax burden, or at least make it more difficult to control.

Disaster management. Under normal circumstances, your retirement income may be adequate to cover mortgage payments. Let’s assume that some of your household retirement income is derived from part-time work or from your spouse’s Social Security benefits, or annuity. Now let’s assume that you lose that part-time job or your spouse dies. These events can immediately and substantially reduce your retirement income, causing a financial disaster because your loan payments do not also diminish. What were manageable loan payments are now an oppressive burden. Moreover, market conditions may put you underwater on the house or car loans, making it impossible for you to sell.

Peace of mind. One of the goals in preparing for retirement is to simplify life so that you have fewer obligations to worry about. A no worries status provides value that easily exceeds the mathematical benefits that may be provided by a financed home. When contemplating your debt status as you prepare for retirement, consider the bigger picture.

If you have not been measuring financial progress toward retirement, start now. Calculating these measures annually can make it easier to track and manage your retirement finances.

Source: US News & World Report