’Risk comes from not knowing what you’re doing’ — Warren Buffett
For many of us it began the day you sat through your first civics class in elementary school, and by now the concept has been drummed into all of us so thoroughly you might even say it’s become part of our cultural heritage. Ask around, and I think you’ll discover it’s pretty difficult nowadays to find anyone unfamiliar with the term, ‘ignorance of the law is no excuse.’
Of course, the concept goes back to a time when laws were grounded in morality and there existed a shared understanding of wrongfulness — when a crime was clearly self-evident. The principle is only valid when those subjected to the law understand the meaning of a certain statute, or, at a minimum, could have determined all the prohibitions of a rule with a reasonable amount of effort.
The premise ‘ignorance of the law is no excuse’ in fact makes a lot of sense — at least in a judicial system with relatively few rules. To the point, it’s hard to imagine anyone having difficulty understanding the meaning of the Ten Commandments, just as a few hundred years ago it would seem unlikely a handful of laws handed down by the local king could have represented much of a hardship for anyone, either.
Politicians don’t really have a plan for you
Today we live in a society that generates scores of new laws and regulations every day of the week at the federal, state, and local levels. In fact, the pace at which new laws are being introduced has become so overwhelming that, according to watchdog groups on Capitol Hill, Congress sometimes passes new laws they don’t even bother to read.
When you think about it, the premise is actually fundamental to the modern day legal system — without it, every time a new law was passed government would also have to provide some kind of program to help educate all citizens as to its meaning and intent before they could be subjected to it.
In other words, if knowledge of the law was not already presumed to be the case for the masses, the education requirements alone would make the passage of any new laws and regulations practically impossible.
Now, let’s follow this same of line of logic for a moment with regard to understanding the laws of finance, especially as they pertain to modern retirement.
There Ought to be a Law
You probably didn’t realize it at the time, but you became the official account manager for your retirement savings the moment you signed up for your IRA or 401K plan. You didn’t get any special training or have to take a test, and it’s likely no one even mentioned it, but you became solely responsible for the oversight and placement of those funds at least until the point in time when withdrawals can be made.
Nor, did you receive any formal training on the fee structure or discuss the impact annual fees can have on the rate of accumulation over the long term with a trained account specialist. That’s simply not a subject any Wall Street representative wants to examine or discuss in too much detail.
But, it doesn’t end there, in fact, they saved the really perplexing part for last.
Because once you’re retired, you are going to have to do a little bit of math — nothing too tough mind you, just some basic multiplication and division.
According to the universally recognized rules of mathematics, in order to determine how much of your savings you can comfortably spend during each year of retirement, you’ll need to multiply the total number of dollars saved by the average percentage of market returns for the time you expect to be retired. Then, you’ll need to take that number and simply divide it by the number of years you plan on making deductions from the account.
But therein lies the problem — because no one can accurately predict how the stock market will perform over the next two or three decades, and not a single one of us was born with an expiration date tattooed on our foreheads — so, how do you do the math?
Well, you can’t, in fact it’s impossible.
Any mathematician knows you must have two components, the multiplicand and the multiplicator, in order to perform the equation and determine the value of the product. Same goes for the division, you’ll need both a dividend and divisor in order to calculate the answer, or quotient. With any one of these numbers missing, you simply can’t do the math — Hey, what was it the teachers used to tell us back in school?, ‘If you don’t know the answer, just take a guess’…..
If you were to ever find yourself on the wrong side of the law, you’d never expect the court (or your attorney for that matter) to accept you didn’t understand something was against the law. Neither should we expect a second chance from Wall Street or the banking industry should we fall short with our retirement savings after spending decades playing by their rules — that’s just not how the world works.
Let’s face it, Wall Street makes a lot of money keeping you in the dark. That’s what makes my job, of turning the lights back on for you, all the more important.
Based on a variety of research, those who take an active role in planning for retirement can expect to end up with double or even triple the wealth of their contemporaries who don’t. That one stat alone puts financial literacy at the top of the list of essential tools when it comes to effective retirement planning.
The good news is today financial literacy is available to each and every one of us — there’s simply no good reason for anyone to accept being unaware of the laws of finance or of the major options available to you in retirement.
In closing, it’s totally absurd to think any individual could know and understand even a fraction of the laws on the books these days, completely invalidating the ‘ignorance is no excuse’ maxim.
Justice may be blind, but that will be of little comfort should a worst-case economic scenario begin to unfold only for you to find yourself completely and irrevocably, unprepared.