Last week’s column laid out a framework for creating a retirement balance sheet.
It focuses on today’s retirement assets, long-term debt and qualitative measures on items such as personal savings rates and insurance to offer a current snapshot. Now, we offer some interpretation:
Assets
Traditional: Experts universally recommended including retirement accounts and taxable savings earmarked for retirement.
Home values spark a wide set of opinions. In light of the housing market collapse, some argued for counting personal residences as consumption rather than a long-term retirement asset. Others felt that wasn’t realistic.
In the end, experts recommended that those planning to remain in their homes include the amount they could receive in a home equity loan or reverse mortgage as an asset and not factor in market value.
Want to sell at some point? Include market value as an asset, mortgages as a liability or debt, and subtract an estimated current cost of alternative housing.
Then there are financial assets you’re building now that you may or may not need in retirement, such as the cash value of a permanent life insurance policy or a 529 education savings plan. Even if you don’t expect to need these, advisers recommended accounting for them as a “just in case” measure.
Non-traditional: Savings rates and contingency plans are important.
Financial advisers typically recommend saving 10 percent of gross salary for retirement, including employer contributions to 401(k) accounts. If you didn’t start saving until your 30s, if your income is very high (and you’ll need a lot more than Social Security to cover expenses) or you’re worried Social Security won’t be there when you need it, shoot for 15 percent.
How much insurance is enough? That depends on individual circumstances, said Chuck Robinson, a financial planner and representative with Northwestern Mutual Wealth Management Co. in Milwaukee. The gold standard for life insurance is seven to 10 times income, said Robinson. The point is to know what you have and understand why it may differ from the norm, he said.
Liabilities
Once you subtract debts from assets, consider less tangible liabilities.
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A key one is job risk, which affects your ability to save, said John Grable, a professor at Kansas State University who has studied the relationship between financial markets and certain professions.
Grable and other academic experts have begun to quantify “human capital,” or your earnings potential, which gradually converts into assets as you near retirement.
You can get a general sense of your own career risk by looking at your Social Security annual earnings statement, Grable said. If you receive slow, steady pay increases every year, regardless of what’s happening in the economy, your pay is equivalent to a low-risk bond position, so you might consider a higher dose of stocks in your long-term portfolio, and vice versa, he said.
If your reported earnings bounce around because of frequent layoffs or variable pay, you can note that on your balance sheet as a high level of job risk. If your balance sheet also records high stock risk and a low savings rate, for example, it should be sounding alarm bells about your retirement path.
Retirement wealth
Retirement is more than a single net worth number, but it doesn’t have to be complex. If your net worth isn’t heading toward 10 to 15 times of your final pay and you earned low scores in most of your savings behaviors, consider this balance sheet a wake-up call.
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Have a retirement question? Write to [email protected], or via mail at Your Money, baiduhai, Room 400, 435 N. Michigan Ave., Chicago, IL 60611. We may include you and your question in a future column.