Saturday, 20 April 2013 00:00

Financial Independence at Risk

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A recent and disturbing finding from the AARP Public Policy Institute’s year-long “Middle Class Security Project” is that unless we are able to reverse the trends that threaten the middle class, many of today’s middle-class workers - especially those in their 20s, 30s, 40s and 50s - will not have a middle-class retirement. In fact, 30 percent of those currently in the middle class will become low-income retirees.

This middle-class squeeze is not just a challenge for the 50-plus population of tomorrow. The combination of high unemployment, low saving rates, decaying pensions, lower home values, higher health costs and longer mortality will inhibit people’s ability to accumulate a sufficient retirement nest egg. To avoid the pitfalls of under-saving, you must be proactive in preparing for a comfortable retirement.

The first place to begin is to assess and take control of your financial circumstances. You cannot control your finances if you have no idea what your financial situation looks like. So start your planning by calculating your personal net worth. It will serve as a snapshot of your financial health, a summary of what is owned (assets), less what is owed to others (liabilities). The formula is: assets – liabilities = net worth.

There are a number of reasons why an individual or family should prepare a net worth statement on an annual basis:

  • A score card: Preparing an annual net worth statement allows an individual to keep track of progress toward meeting long-term financial goals. Ideally, your net worth should increase each year. Always keep in mind that paying down debt is a no-risk investment;
  • A financial inventory: Your net worth statement is a useful financial inventory; it should be updated each year and kept with your Will and other estate documents. This allows your loved ones (who you might not otherwise share this information with) to easily know what your estate looks like in the event of your demise;
  • A planning tool: The net worth statement also serves as a planning tool. For example, a review of the net worth statement may show that an individual or family has too few liquid assets (for emergencies), that there is too much debt relative to assets or that investments are too heavily concentrated in one area, or there is just not enough savings overall to support your current lifestyle during your retirement years;
  • Lenders may need it: An individual’s net worth is required information on most loan applications. In addition to bank loan offices, college financial aid programs will usually require information on the parents’ net worth when a child applies;
  • For certain investments: Certain types of high-risk investments require prospective investors to have a minimum level of net worth before they are allowed to invest money.

Preparing a personal net worth statement is easy:

  • List and then add up the value of your Assets. Assets might include bank accounts, money owed to you, investments, personal property, retirement plans and real estate;
  • List and then add up the value of your Liabilities. Liabilities might include college loans, credit card balances, auto loans and real estate mortgages. It may be necessary to contact the lender to get the current balance on a loan or account;
  • Now subtract your total Liabilities from your total Assets. You now have the difference between what you own and what you owe...your personal net worth.
  • If your assets are greater than liabilities, then you have a positive net worth. Conversely, if your assets are less than liabilities, then you have a negative net worth. Your goal should be to have a positive net worth and to make your net worth grow from year to year.

    Now you know where you stand financially; this is the first step toward financial independence. Awareness of your circumstances allows you to become proactive in your planning, to avoid a decline in your standard of living, or worse...such as becoming dependent on your adult children.

    In my next installment I will talk about how to manage your cash flow and take control of expenses so you can save more.

    William C. Newell, Certified Financial Planner (CFP), is president of Atlantic Capital Management, Inc. a registered investment advisor located in Holliston, Mass. With Wall Street access and main street values Atlantic Capital Management has been providing strategic financial planning and investment management for over 25 years.

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