First Person: Doing a Retirement Self-Assessment

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I recently did a retirement self-assessment. I've seen Suze Orman do this on a regular basis on her weekly television show, yet I've never done one myself. Sure, I've reviewed our retirement situation and I know about all there is to know regarding our personal finances; however, I've never actually sat down and given us a grade on our retirement planning. However, when I did so, I was somewhat surprised. While I tend to pride myself on my financial awareness, I could only give our overall retirement situation a grad of a C…C+ at best.

Here is how I did our retirement self-assessment and why I gave us the grade I did.

Comparing Assets to Liabilities

Much like Suze does in her show, I started off our retirement self-assessment comparing assets to liabilities. In our case, this has gotten somewhat easier since we paid our greatest liability off just over a year ago by way of selling our home and ridding ourselves of our mortgage. Without credit card debt, and by owning our vehicle outright, our right hand column was thankfully left devoid of liabilities.

For the asset column, I listing things like our individual retirement accounts from previous employers, our emergency fund, savings, our vehicle, and our home (with a valuation based upon purchase price minus 15 percent for things like agent commission, closing costs, and repairs/updates when we sell). In an effort to get a more accurate asset total, I took this aspect of our self-assessment a step further by devaluing items like our retirement accounts by 15 percent to factor in eventual taxes owed on the proceeds from these assets.

Evaluating Risk

Next, I evaluated risk in our asset diversification. Depending on one's outlook, this area was either really good or really bad. I think 'ol Suze Orman would be unhappy with us since a large portion of our retirement accounts are in lower risk investments such as bonds, index, and income funds.

While such lower risk diversification provides us with peace of mind in the near term, it could possibly backfire on us over the long-term. With at least three decades until retirement, we have room for more risk; however, we just feel that in the current economic environment, we're content to take a lower grade on this area of our retirement self-assessment in an effort to build a little more security into the savings we do have.

Looking at Timeframes

The third step in my retirement self-assessment came by way of considering timeframes. As I mentioned previously, we still have about three decades until we reach what many consider retirement age. With this timeframe ahead of us, we still have time to drastically alter our retirement future…for better or worse.

Creating a timeline that includes things like college for the kids, when Social Security could kick in and in what amounts, desired retirement age, and similar financial flashpoints along the road to retirement has helped us get a better handle on this area of our retirement future.

Understanding for example that putting away $3,000 a year at 6 percent over the next 30 years could bump our retirement savings up by about $250,000, as opposed to doubling that payment to $6,000 a year at 6 percent over a period of just 15 years, which would result in just about $150,000, is where a longer retirement planning timeframe could really pay off.

Understanding Income vs. Expenses

Finally, I wanted to evaluate our income versus our expenses, yet another step Suze Orman takes when grading people on their retirement situation. This was fairly easy for me since I've been tracking my own expenses for years, and as a self-employed individual, I must keep careful tabs on my income.

Comparing the two (after adding in my wife's side of things as well), I was able to come up with an expense-to-income number. The differential between expenses and income was not as high as I would have liked. After seeing this number, it pinpointed that we still have work to do in this area, and it was the final determining factor in my assigning us the grade of a C for our retirement planning.

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