Your Largest Liability

Every month I calculate my net worth. You should do this too. Just add up all your assets. Then add up all your debts, subtract debts from assets; voila! Your net worth. Watch it go up or down. If you don’t like the direction or the velocity, do something about it.

Ah, but in my monthly calculation I am forgetting my largest liability, retirement. Don’t worry, in the past five years I have done my best to wear out all the retirement calculators on the web.

What happens if I subtract my largest liability from my net worth?

Here are some scary thoughts from an article entitled, 17 Frightening Facts About Retirement Savings in America By John Reeves.

Nearly 75% of retirees have not saved enough and said they would save more if they could do it all over again. (Source: Health and Retirement Study)

Half of current retirees surveyed say they left the work force unexpectedly as a result of health problems, disability, or getting laid off. If you think you'll just "work forever" instead of planning for retirement, you may want to think again. (Source: Employee Benefit Research Institute)

For a low earner retiring at 62 -- Social Security replaces 40% of pre-retirement earnings. This is unlikely to provide for a comfortable retirement. (Source: Employee Benefit Research Institute)

At age 65 and above, Social Security benefits provide more income than any other source for over 60% of households, regardless of marital status. With an average monthly benefit of $1,230 for retired workers, this indicates that a lot of retirees must be struggling. (Source: Health and Retirement Study)

One-third of households end up entirely dependent on Social Security; for low earners that portion is 75%. (Source: Center for Retirement Research)

A 65-year-old couple retiring in 2012 is estimated to need $240,000 to cover medical expenses throughout retirement. (Source: Fidelity Investments)

21% of workers covered by 401(k) plans choose not to participate.(Source: Center for Retirement Research)

I think that is just about enough to make the point, we are not doing a very good job preparing for retirement. Please, don’t wait to be rescued by the savior state. Do something to improve your situation. Please, start today.

Build an emergency fund

Get out of debt

Take advantage of your 401-K, especially if there are matching funds. Never turn down free money.

Save—Your savings are the seeds for tomorrow

Keep learning how to invest your money for the rest of your life. It isn’t rocket science. You can do it!

Do the calculations. If you don’t want to go through the calculation for the 4% rule or use one of many retirement calculators available on the web, here is a rule of thumb that is really simple. Take your current gross salary multiply that number by 20.

Example:

$50,000 X 20 = $1,000,000

That number includes your house and your 401-K. It does not include the value of your Social Security annuity. It assumes you have no pension.

Yes that is a very scary number. I think it is overly pessimistic, but it does let you know that saving for retirement is a very serious issue that needs to be addressed sooner rather than later.

The biggest problems are ignorance and inertia.

Here is a quote from Are 401(k) Plans a Failed Experiment? By Sara E. Murphy. “The Dodd-Frank Wall Street Reform and Consumer Protection Act required the SEC to study financial literacy among retail investors. The SEC published the results of that study this August. It makes for dire reading. Consider the key finding: "Investors have a weak grasp of elementary financial concepts and lack critical knowledge of ways to avoid investment fraud." To put this more clearly, most investors do not understand such fundamental notions as compound interest and inflation. Notice that we're talking here about investors, not the general public. These folks are already market participants, and they don't have even the most basic comprehension of the abyss into which they're tossing their cash.”

Ignorance can be fixed. I will continue to try and do my part.