By Todd Moerman
Learn more about Todd on NerdWallet’s Ask an Advisor
A good starting point for investors to gage net worth (NW) is to find out how he or she is doing compared to other investors. At my firm, we like to benchmark. We compare clients and potential clients to other millionaires to provide data driven feedback. Using a simple formula, find out if you are above or below your personal projection for net worth. Click here to find out how to calculate your projected net worth index.
Keep in mind that your personal benchmark is a starting point (based on your age and earnings) to become a better accumulator of wealth. You should care most about the trend of your net worth. We suggest that you track and monitor your net worth yearly, at minimum.
Here are the 7.5 Dangers that can destroy your net worth (NW):
1. Not saving enough! Given the current environment for investing, we suggest that you save 12% to 20%+ of gross household income (before taxes) on a yearly basis. This includes 401k, company match, IRA and taxable accounts. If your actual NW is less than your projected NW, you might want to save closer to 20%+.
2. Poor health! Your health is the foundation to your retirement. In a recent 2011 Retirement Confidence Survey, 70% of current workers plan to work past age 65. Actual experience of retirees shows that only 28% work past age 65. The top reasons are: 65% are unable to keep working do to health or disability problems. 23% stop working due to company downsizing and 18% stop to care for another family member or spouse. If you retire in 2020, the projections are that you will need at least $350k to cover 90% of your projected medical expenses.
3. Inflation. Inflation is known as the “silent tax” because you lose purchasing power each year. Over time, this compounding adds up. This is true especially for high inflation categories like housing, medical, food and energy. If you need to have $1.5MM in today’s dollars for retirement, in order to maintain your purchasing power, you will need roughly $2.7MM if you want to retire in 20 years (3% inflation per year).
4. Changes to entitlements. Your retirement planning should include a highly probable scenario that government entitlements like Social Security and Medicare will change over time. Simply put, our elected officials have not done a good job of funding these programs and changing them for current times. Odds are that you will see retirement ages start to change to 70 years and older. In addition to government changes, your company pension may either be dropped or be funded less. This process has already begun in many companies. The net result: substantially less money for you coupled with your need to save so much more.
5. You may outlive your money! According to Boston College Center for Retirement Research, a married couple at age 62 today has an 85% chance of one spouse living to at least 80 years old and a 40% chance that one spouse will reach age 90 or older. Increasing life expectancy will result in more people running out of money.
6. You may be paying too much to your Advisor! If you use an Advisor, odds are that you are paying them much more than you realize and they may be selling you product you don’t need. The industry average is 1% of assets for the Advisor but there are many other fees like operating expenses, sales loads, commissions and kick-backs via 12b-1 fees. In 2010 alone, 12b-1 kick-backs were $10.6 Billion! Make sure your Advisor is a fee-only fiduciary for YOU. According to a recent PBS show, only 15% of the 400,000+ Advisors are a fiduciary for their clients. This means that 85% are NOT a fiduciary! I’ve never met an investor who understands this concept, that would choose to work with someone who was not legally bound to this obligation. Too many smart investors don’t understand this concept… and it’s killing them financially.
7. You may not be qualified to manage your own money! Wall Street has a dirty little secret! They want your money! They need your money! They have created an elaborate and complex food chain that is very expensive. Many investors don’t realize that there is a science to investing . Most active mutual fund managers don’t beat their benchmark over time. See the data here. Also see our Why DFA page to find out more about the science of investing.
7.5 You are not taking action! The best time to plan for a solid retirement was many years ago. The next best time is today! Find out if you are on track. Get a written plan that includes cash flow goals, savings goals, net worth goals, retirement goals and yearly tracking. Sometimes not making a decision IS a decision… one that may cost you a fortune.