What is your most valuable asset? Whenever I ask someone that question I'll get a variety of answers, but typically people will tell me their home or their 401(k) are their most valuable assets or someone might say its their coin collection (if it's a good one) or their business if they own one - as you would expect.
Occasionally I'll hear other types of assets but it is rare that someone will give me what I believe is the correct answer. Now, I am not talking about things that you can't really value, such as our families or our relationships with friends... these things are priceless to us. I am looking for something we can actually place a financial value on.
Did you figure it out yet? It is your ability to earn an income. How do you value this? It's really quite easy (at least with the help of a calculator.) Without even bothering to factor in inflationary salary or income increases, a person making $75,000 per year would earn $1,125,000 over a 15 year period. Someone making $150,000 would earn $2,250,000 over the same time period. I think we'd all consider any investment that was worth $1,250,000 or $2,250,000 to be a valuable investment at some level. Why don't we then place a value on our ability to earn it?
When it is put that way, a person might now agree, that yes, our ability to earn income is a valuable asset. However when you look at how few people seem willing to protect that income, it seems clear that the message isn't getting through.
What does all this have to do with investing for your future? It has everything to do with it. We talk a great deal in my business about asset accumulation, asset diversification, and asset allocation, but we don't spend enough time talking about the one asset that makes it all possible... our ability to generate the income that allowed us to accumulate those assets. Most working Americans don't have enough to last more than 1year without depleting those assets if they were to lose their income for any significant period of time. Just take your existing assets that you'd have access to and start drawing them down by whatever your monthly or annual expenses are. Factor in taxes if most of your assets are in retirement accounts. Poof - years of savings gone in a relative instant.
I have managed to make it this far without saying the one word that would have probably resulted in your finding something else to read very quickly. If you have not figured it out yet, I am talking about loss of income due to a long term disability.... And yes I know that nobody wants to talk about it or admit that we are all vulnerable to the possibility.
The LIFE Foundation designates May of each year as Disability Insurance Awareness Month. I am not going to put you to sleep or try to shock you into action with statistical overkill, but given that it is still May for a few more days, I wanted to use the occasion to try to get you to think about a few things and I will have to use a few statistics in the process, but I promise to be economical in their use.
1Commissioner's Disability Insurance Tables A and C, assuming equal weights by gender and occupation class.
2CDA Personal Disability Quotient (PDQ) Calculator.
32010 Gen Re Disability Fact Book
4GET SICK, GET OUT: THE MEDICAL CAUSES OF HOME MORTGAGE FORECLOSURES: Christopher Tarver.
5Social Security Administration, Disabled Worker Beneficiary Statistics, ssa.gov
Occasionally I'll hear other types of assets but it is rare that someone will give me what I believe is the correct answer. Now, I am not talking about things that you can't really value, such as our families or our relationships with friends... these things are priceless to us. I am looking for something we can actually place a financial value on.
Did you figure it out yet? It is your ability to earn an income. How do you value this? It's really quite easy (at least with the help of a calculator.) Without even bothering to factor in inflationary salary or income increases, a person making $75,000 per year would earn $1,125,000 over a 15 year period. Someone making $150,000 would earn $2,250,000 over the same time period. I think we'd all consider any investment that was worth $1,250,000 or $2,250,000 to be a valuable investment at some level. Why don't we then place a value on our ability to earn it?
When it is put that way, a person might now agree, that yes, our ability to earn income is a valuable asset. However when you look at how few people seem willing to protect that income, it seems clear that the message isn't getting through.
What does all this have to do with investing for your future? It has everything to do with it. We talk a great deal in my business about asset accumulation, asset diversification, and asset allocation, but we don't spend enough time talking about the one asset that makes it all possible... our ability to generate the income that allowed us to accumulate those assets. Most working Americans don't have enough to last more than 1year without depleting those assets if they were to lose their income for any significant period of time. Just take your existing assets that you'd have access to and start drawing them down by whatever your monthly or annual expenses are. Factor in taxes if most of your assets are in retirement accounts. Poof - years of savings gone in a relative instant.
I have managed to make it this far without saying the one word that would have probably resulted in your finding something else to read very quickly. If you have not figured it out yet, I am talking about loss of income due to a long term disability.... And yes I know that nobody wants to talk about it or admit that we are all vulnerable to the possibility.
The LIFE Foundation designates May of each year as Disability Insurance Awareness Month. I am not going to put you to sleep or try to shock you into action with statistical overkill, but given that it is still May for a few more days, I wanted to use the occasion to try to get you to think about a few things and I will have to use a few statistics in the process, but I promise to be economical in their use.
- One in eight workers will be disabled for 5 years or more during their career.1
- A 35 year old male has 21% chance of becoming disabled for 3 months or longer during his working career and there is a 38% probability that disability will last 5 years or longer, with the average disability lasting 82 months.2
- Amongst all workers the average length of a disability related absence from work is 32.1 months.3
- In 2006, medical problems contributed to over half of all the foreclosures in the country --- over half... (I thought that one was worth repeating)4
- Social Security will cover me. Don't bet on it. About 65% of all claims are denied on the first attempt and it can ultimately take 2-4 years for a successful effort. Can your resources last that long? Also the maximum benefit is only about $2,000 with the average being $1,065 per month... Do either of those cover your expenses?5
- I have coverage through work. That is great if you do, but group policies usually only cover up to 60% of your salary and have some kind cap typically. If your employer pays for it, the benefit will be taxable making your actual net benefit only about 50%. Also, group policies are offset by any benefits from Social Security.
- I already have accident insurance. 95% of disabilities are caused by illnesses, not accidents. (From the Council for Disability Awareness website)
- I can use my savings or investments. We've already discussed this one. For most of us there's a good chance they won't last long enough. If you do recover and get back to work, you can't get those years of savings back.
- I just don't think it will happen to me. Statistically speaking, you might be right. But, on the other hand, statistically speaking, you could be wrong. We've covered some of the numbers - are the chances small enough that you'd want to bet on it?
- I just can't afford it. No one wants to spend money on something we hope we never need. But consider this: You have insurance on your home, your car, your boat, your business, your health and probably on your life and any number of things, and none of this is cheap either. Yet you have it. If it is important enough to have insurance to protect the other things that are valuable to you, shouldn't you insure the income that pays for all these things - AND the insurance you have on them? I hesitate to use this tired cliché, but how can you afford not to?
1Commissioner's Disability Insurance Tables A and C, assuming equal weights by gender and occupation class.
2CDA Personal Disability Quotient (PDQ) Calculator.
32010 Gen Re Disability Fact Book
4GET SICK, GET OUT: THE MEDICAL CAUSES OF HOME MORTGAGE FORECLOSURES: Christopher Tarver.
5Social Security Administration, Disabled Worker Beneficiary Statistics, ssa.gov
E-mail Kimber with any thoughts you may have regarding this post.