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Five personal checks on your financial health

What is good financial health? Are there a minimum number of 'big picture', timeless, universal and objective indicators of financial health that can be easily measured and monitored? What benchmarks or targets for those indicators should be met or exceeded to signify good financial health?

These were the questions we asked at my previous financial planning firm, Wealth Foundations, starting around 2010. Our aim was to provide a simple but robust, high-level framework for assessing good financial health, both for existing and potential clients.

After a number of iterations, in mid-2012 we finally settled on five indicators and, subsequently, saw no need for any further change.

Having now retired as a financial planner, and with the consent of Wealth Foundations, the purpose of this article is to introduce this personal financial health framework to a wider audience.

The hope is that it will provide anyone who is willing to do a little homework with a sound basis for understanding the current state of their financial health and the direction they need to head to improve it.

What is good financial health?

First, “What is good financial health?”. We equate good financial health with financial independence. Financial independence is having sufficient accumulated investment wealth to support your desired lifestyle, indefinitely, without the need to work.

Of course, you can choose whether and how much you want to continue to work but you don’t need to earn exertion income. So, financial independence isn’t necessarily retirement.

Five key indicators of good financial health

The first indicator is the Investment wealth ratio, defined as your net investment wealth (i.e. investment wealth less debts), divided by your net worth. It’s examining the question “Is too much of your wealth allocated to lifestyle assets?”.

For good financial health, the benchmark for this indicator is set at a minimum of 55% i.e. at least 55% of net worth needs to be held as net investment wealth and no more than 45% as lifestyle assets (e.g. own residence, holiday home, cars, boats etc.).

The benchmark was chosen based on experience with Sydney-based, high net worth/high income financial planning clients and is, admittedly, a little arbitrary. But its rationale is to highlight that if too much of your wealth is tied up in lifestyle assets, financial independence may be elusive.

The second indicator is called the Retirement expenditure multiple. It’s calculated as your net investment wealth divided by your desired annual retirement (or financial independence) spending. It’s looking directly at the issue of “Will you run out of money?”.

The financial independence benchmark for this indicator is a requirement for net investment wealth that is at least 25 years of desired annual retirement spending. It’s the equivalent of the often criticised '4% safe withdrawal rate'.

For those who argue that the benchmark should be more than 25, the reality is that most Australians fall so far short of it that pushing for a higher number is largely academic. And, for those who argue it’s overly conservative, my retort is that you better not plan on living to age 100.

Regardless, the Retirement expenditure multiple benchmark, like all the benchmarks, is a 'rule of thumb', rather than a hard and fast dictate. The benchmarks provide meaningful targets that those who desire to be financially independent can compare their circumstances with.

The third indicator is the Tax effectiveness ratio. It’s your total superannuation holdings divided by your Projected lifetime investment wealth. Projected lifetime investment wealth is your current net investment wealth plus an estimate of the amount you expect to save between now and the date of your desired age of financial independence or retirement.

The Tax effectiveness ratio is a proxy measure to answer the question “Are your investments held tax effectively?”. The benchmark for this measure is at least 75%. Its basis is that since superannuation is currently a very tax effective environment in Australia and it’s where most people should hold the majority of their investment wealth.

Again, it’s a rule of thumb rather than a dictate. There will often be legitimate reasons why the benchmark won’t or can’t be achieved, without jeopardising the goal of financial independence.

The fourth indicator is the Growth asset allocation ratio. It’s your growth investment assets (i.e. shares, direct property, share and property managed funds/ETFs) as a percentage of Projected lifetime investment wealth, discussed above.

The focus here is “How much investment risk are you comfortable with?”. The target or benchmark will differ for each investor. “The target asset allocation decision” discusses this choice in more detail.

However, for most, we advocate that your maximum risky growth asset exposure when financially independent and/or retired shouldn’t exceed a level that would cause you to lose sleep, due to anxiety, and, perhaps, abandon a sound investment strategy in troubled markets. This is generally guided by an assessment of your attitude to investment risk.

The final indicator is the Investment diversification ratio. It’s calculated as your diversified investment assets (i.e. your total investment assets less, primarily, concentrated holdings such as investment properties and large individual share holdings) divided by your total investment assets.

The issue this indicator addresses is “Have you too many investment eggs in one basket?”. Investment theory suggests that concentrated investment holdings offer no expected return premium for their additional investment risk compared with the relevant, well diversified, asset class. Consequently, they aren’t regarded as consistent with good financial health.

While our benchmark for the Investment diversification ratio is a minimum of 75%, our view is that you should diversify your investment holdings as broadly as you cost effectively can.

Summarising a universal framework to assess your financial health

The table below summarises the five financial health indicators discussed above and their recommended benchmarks.

Good financial health is revealed by being at or above each of the indicator benchmarks. You’ll notice that it’s not directly dependent on how high your income is or how much you’re worth.

While shortfalls on some benchmarks may not be a major problem, the framework encourages you to address the reasons for any divergences.

And, of course, should you fall well short on a number of the benchmarks, the direction of the changes you need to make to improve your financial health, in terms of the framework, should be apparent.

So, how’s your financial health?


John Leske is Founder and CEO of finhealth, the provider of an approach to assessing the state of your personal financial health. The article describes a general framework to compare your current situation with some meaningful financial benchmarks. No specific personal financial advice is provided and it is up to readers to determine what actions, if any, they take in response to the article. A more detailed explanation of the indicators can be found in the free eBook, “What is finhealth?”.


John Leske
February 04, 2022

Thanks for the comments. Want to reiterate that indicators and benchmarks aren’t hard and fast, but attempts to provide some guidance, or “rules of thumb”, to five “big picture” questions that, in my view, need to be satisfactorily answered for good financial health i.e.:

1. What’s an appropriate balance between lifestyle and investment wealth?;
2. How much “money” or investment wealth do I need for financial independence?;
3. Is my investment wealth held tax effectively?;
4. How much investment risk should I take?;
5. Am I taking that investment risk efficiently?

The free eBook, “What is finhealth?” (link provided at the end of the article) provides a lot more detail (perhaps, too much) on why the indicators and benchmarks were chosen.

Jeff O
February 06, 2022

Thanks John
I'll take a closer look at your eBook; keen to see how it incorporates home equity/savings release - the main source of private savings and investment - the financial position of most older Australians and gearing for wealthy Australians
For the 80% that own their home at retirement, it needs to be properly incorporated. And for the very wealthy Australians that easily pass your big 5 - consideration of gearing; since many have homes worth at least $2.5m (within 10 kms of CBDs) - and this illiquid asset is un or under leveraged.
For those on low retirement incomes - largely dependent on the govt aged pension - and own their home, a very small
loan capitalising interest at 3.95% - can boost their age pension by 1.5 times!!!! Rates should be lower, but retiree still left with plenty of capital for aged care....bequests...albeit that's a personal choice too

Harry Krinelos
February 03, 2022

Life is so simple. Common sense. Keep things simple please. Wealth is wealth no matter how much jargon. 

Alexander Stitt
February 03, 2022

Thanks for this article, John. While I don't expect to live to 100, I do feel, at least for those with a reasonable base of wealth, that "at least 25years" on your second measure is overly conservative. To my mind it implicitly assumes zero return on all those assets over the "25 years" where reality for anyone with a balanced to aggressive investment mix and drawing down only 4% p.a. is that they would find themselves on their deathbed with their whole corpus intact but having lived more frugally than they needed to.

February 03, 2022

Thankyou John for a most informative article distilled from your years of experience.
I wonder whether the Tax Effectiveness Ratio hits a barrier due to the Superannuation Transfer Balance Cap when super is no longer a tax effective vehicle?

February 04, 2022

But even funds in accumulation outside of the TB cab are only taxable at 15/10%. Far better than personal tax rates.

February 03, 2022

Great article John, very useful as I am looking at whether to buy a holiday house or not.. (NOT, based on your ratios)

However, slightly confused by the Tax Effectiveness Ratio - My assumption is that any saving between now and Retirement will be done inside Superannuation. Is the point that any saving outside Super would be better off in Super, all else being equal ? i.e converting bank savings accounts into Post Tax Super contributions ?

February 03, 2022

My test: check what rate of minimum return is required to meet financial objective:

Those with < ~$2,000,000 non-home assets:
• liquidate all Age Pension SweetSpot Assessable Assets,
• invest personally not more than $405,000, (returning Age Pension SweetSpot Assessable Income of <= 26 * 320 = $8320 / y; ~2% / y)
• apply for age pension of 26 * 1458.60 / y = $37,923.60 / y.
• efficiently invest remaining capital in home improvement.
Result is $46,243.60 / y tax free + ~6% capital gains tax free / y.
Cost of living ~$20,000 / y. Entertainment affordable ~$26,243.60 / y.

Those with >= ~ $2,000,000 can find the minimum rate of return which will support the retirement end goal, typically $0 + Age Care capital.

= (1 + RATE((AgeCareAge - AgeRetire), AnnualWithdrawal, -CapitalStartRetire, CapitalEndRetire, 0)) * ( 1 + Inflation%) - 1

If rate of return is unattainable or risk unacceptable then AnnualWithdrawal is infeasible.

If rate of return is improbably small then AnnualWithdrawal is probably too small.

= (1 + RATE((92-67), 40000, -4000000, 0, 0)) * ( 1 + 3%) - 1
= -5.9%

February 04, 2022

So the only "financial objective" worth considering is optimising the aged pension?
Seems that I need an upper story extension in order to efficiently invest remaining capital in home improvement... or maybe a knockdown-rebuild is a better plan?
And if something happens which requires access to that excess capital then a reverse mortgage is always an option.

Sorry Dudley, but my financial plan is more about peace of mind than optimising the aged pension. The last thing I want to be relying on is the government not changing the rules.

February 04, 2022

Then you will require > ~ $1.5 - ~ $2.0 M and take risk to beat the 7.8% return on converting Age Pension Assessable Assets to non-Assessable Assets (ie home) - due to the Age Pension Asset Test Taper Rate.

Moving is also a possibility but comes with added transaction stamp / transfer duty cost.

February 03, 2022

The first indicator seems strange to me. If somebody owns a 3 million dollar home outright, and has net 2 million dollars in investments outside of their home value, then they are not in good financial health because the investment wealth ratio is less than 55% ( in this case only 40% ) ?? 

Graeme N
February 03, 2022

Agree. Possibly there needs to be some change to the formula to allow for the principal place of residence

John Leske
February 03, 2022

As a rough rule of thumb (i.e. the Retirement expenditure multiple), $2 million of investment wealth would support an $80,000 a year retirement lifestyle. Generally, my financial planning experience suggested people with $3 million homes would expect to live more lavish lifestyles than this.

However, with house prices rising at over 20% p.a., the appropriate ratio can be a bit of a moving feast. As mentioned in the article, its purpose is to highlight that too much emphasis on lifestyle and lifestyle assets will make it more difficult to achieve financial independence.

March 06, 2022

John, you obviously are using the 4% drawdown rule and 7 years in to retirement I think this (literally) sells retirees short! With franking credits, a well constructed portfolio and a couple of extra percentage points of drawdown a much more comfortable retirement can be enjoyed with a rapid depletion of capital (in fact, so far, without eroding capital at all).

February 03, 2022

Better health:
. Own house with minimal ongoing and upkeep costs and valued at all but $405,000 of new worth where new worth < ~ $2,000,000.
. Receive Age Pension, deemed earnings on $405,000, ~6% / y capital gains, 3% / y imputed rent.
. Ratio = 405,000 / 2,405,000 = 17%.

February 09, 2022

I am getting to the cranky stage in my life. I would rather live in a tent than subject myself to Centrelink's petty tyrannies for the rest of my life (hyperbole - not a tent).

February 10, 2022

"rather live in a tent than subject myself to Centrelink's petty tyrannies":

I knew a ringer who lived in a cave, shared bran and molasses with his quarter horse and was good at barbecuing wallaby.


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