Liquid Term (Lt)
What is it?
Liquid Term (Lt) is an important concept with respect to personal financial planning. The relatively comparable metric in corporate finance would be the "quick ratio" or "cash ratio." Lt indicates the number of years you could live off of your current liquid assets (cash, savings, CDs, after-tax investments) should your flow of earned income be disrupted (job loss would be the most common cause).
For example, if you had $100,000 in cash, savings, and taxable brokerage accounts, and your required monthly fixed and variable expenses were $5,000 (or $60,000 annually), your Lt would be 1.7. Put another way, you could live off of your current liquid assets for approximately twenty months before running out of money.
Liquid Term (Lt) is an important concept with respect to personal financial planning. The relatively comparable metric in corporate finance would be the "quick ratio" or "cash ratio." Lt indicates the number of years you could live off of your current liquid assets (cash, savings, CDs, after-tax investments) should your flow of earned income be disrupted (job loss would be the most common cause).
For example, if you had $100,000 in cash, savings, and taxable brokerage accounts, and your required monthly fixed and variable expenses were $5,000 (or $60,000 annually), your Lt would be 1.7. Put another way, you could live off of your current liquid assets for approximately twenty months before running out of money.
Why is it important?
We live in uncertain times, with very few occupations coming with any type of guarantees. Furthermore, the days of pension plans are gone for most Americans, and even Social Security income could feasibly face disruption. For peace of mind, it is important to have adequate liquidity to weather the unexpected. The higher your personal Lt figure, the more freedom you have to pursue other aims in life, unshackled from the anxiety surrounding money concerns.
We live in uncertain times, with very few occupations coming with any type of guarantees. Furthermore, the days of pension plans are gone for most Americans, and even Social Security income could feasibly face disruption. For peace of mind, it is important to have adequate liquidity to weather the unexpected. The higher your personal Lt figure, the more freedom you have to pursue other aims in life, unshackled from the anxiety surrounding money concerns.
What is a good liquidity score?
Keep in mind that Lt differs from an emergency fund. Most financial planners would recommend having around six months of cash on hand in an emergency fund, but a "comfortable" liquidity score would be closer to four years (Lt = 4.0). A "secure" Lt would be in excess of twelve years, though most Americans are nowhere near that level. (If you had $600,000 in liquidity and monthly expenses of $4,000, your Lt would equal 12.5.) However, it is important to continually strive to increase your Lt factor.
Keep in mind that Lt differs from an emergency fund. Most financial planners would recommend having around six months of cash on hand in an emergency fund, but a "comfortable" liquidity score would be closer to four years (Lt = 4.0). A "secure" Lt would be in excess of twelve years, though most Americans are nowhere near that level. (If you had $600,000 in liquidity and monthly expenses of $4,000, your Lt would equal 12.5.) However, it is important to continually strive to increase your Lt factor.
How do I monitor my Lt?
All clients of Penn Wealth Management have access to their Liquid Term rate as part of their financial planning platform. Please contact us for details.
All clients of Penn Wealth Management have access to their Liquid Term rate as part of their financial planning platform. Please contact us for details.
Qualified Term (Qt)
What is it?
Similar to Lt, Qualified Term (Qt) indicates the number of years you could live on your current qualified retirement assets at your current lifestyle if neither changed. Retirement assets include:
Similar to Lt, Qualified Term (Qt) indicates the number of years you could live on your current qualified retirement assets at your current lifestyle if neither changed. Retirement assets include:
- Roth & Traditional IRAs
- 401(k) plans
- SIMPLE IRA
- SEP
- Annuities
- Profit Sharing Plans
Why is it important?
Generally, by maximizing retirement plan contributions each year in the appropriate vehicle, you will end up with a lower tax liability and greater accumulated balances over time—as these assets are growing unencumbered by taxes. Unlike liquid assets, however, qualified assets (outside of a Roth IRA) are fully taxed as ordinary income at the time of withdrawal. Additionally, withdrawals under a certain age are subject to a 10% penalty on top of full taxation. Finding the right balance between retirement accounts and liquid accounts is a critical step in the financial planning process.
Generally, by maximizing retirement plan contributions each year in the appropriate vehicle, you will end up with a lower tax liability and greater accumulated balances over time—as these assets are growing unencumbered by taxes. Unlike liquid assets, however, qualified assets (outside of a Roth IRA) are fully taxed as ordinary income at the time of withdrawal. Additionally, withdrawals under a certain age are subject to a 10% penalty on top of full taxation. Finding the right balance between retirement accounts and liquid accounts is a critical step in the financial planning process.
What is a good Qt score?
Since qualified accounts have the benefit of growing tax deferred, and since the largest part of a typical worker's retirement portfolio is their qualified company plan, qualified assets are generally a much larger portion of the portfolio than are liquid assets. Therefore, unless you are in the earliest phases of your career, you should have a larger Qt score than Lt score. For example, someone in their mid-40s may have an Lt of 2 and a Qt of 5. Working with a financial professional, it is important to define the correct numbers based on your unique situation, and to assure you reach those numbers as efficiently as possible.
Since qualified accounts have the benefit of growing tax deferred, and since the largest part of a typical worker's retirement portfolio is their qualified company plan, qualified assets are generally a much larger portion of the portfolio than are liquid assets. Therefore, unless you are in the earliest phases of your career, you should have a larger Qt score than Lt score. For example, someone in their mid-40s may have an Lt of 2 and a Qt of 5. Working with a financial professional, it is important to define the correct numbers based on your unique situation, and to assure you reach those numbers as efficiently as possible.
How do I monitor my Qt?
All clients of Penn Wealth Management have access to their Qualified Term rate as part of their financial planning platform. Please contact us for details.
All clients of Penn Wealth Management have access to their Qualified Term rate as part of their financial planning platform. Please contact us for details.
