8 Additional Financial Risks to Address

By Patrick Doherty, CFP®

Last week we covered 7 (of 15) topics that should be on everyone’s financial planning checklist. Here are the remaining 8 items on your checklist (including an easy way to save an extra $27,000):

What retirement lifestyle factors (travel, leaving an inheritance, etc.) are absolutely essential to you, and are they accounted for in your financial plan?

The point of having money is achieving lifestyle security. If travel is an integral aspect of your desired lifestyle, factor in travel expenses when planning your financial future, particularly early on when deciding when you can retire and how much you need to save.

The earlier you establish a plan to be able to afford what matters most to you, the more likely you are to achieve your goals. As our CEO Bob Reby, CFP® has said, “Failing to plan is planning to fail.”

If you’re like most people (i.e. not insanely rich), every spending decision is a tradeoff. For the sake of an example, let’s stick with travel as your “must have.” But it can be anything that’s important to you. If you’re 15 years from retirement now, and you really want travel to be a part of your life forever, you can make other tradeoffs now.

Give up your daily $3 Starbucks, for example, earn a very achievable 6% return on the money you save, and 15 years later your retirement travel fund is $27,000 larger (according to the savings calculator at practicalmoneyskills.com). How many times can you fly to Vegas or Florida with $27K? How many rounds of golf can you play? And how much do you love that coffee?

Have you planned for tax efficiency and certainty of the inheritance you leave behind?

When your children inherit a legacy, how they take it can result in significant tax savings. It can make a significant difference whether the inheritance is taken in a lump sum, deferred over five years, or spread out over a lifetime.

An inheritance can count as income, and a large inheritance can push almost anyone into the highest tax bracket. But if the heir is in a lower bracket before inheriting money, deferring the inheritance can result in many thousands of dollars in tax savings. You can also use life insurance to ensure a low-tax (or tax free) legacy, as most insurance payments are non-taxable.

Life insurance also adds a high degree of certainty to the legacy. If you don’t want to purchase insurance, one possible strategy to add legacy certainty is simply putting a portion of your money into an account that you never touch, and live off of your money in other accounts.

Have you set aside sufficient funds to account for unplanned expenses?

I’m sure you’ve heard and read about the importance of having an emergency fund many times before, so I’ll keep this section short. I am including it here because no financial planning checklist is complete without an emergency fund. The best laid plans often go awry, so assume you’ll need 9 – 12 months of income stashed away for emergencies.

Are your inheritance documents complete and up-to-date?

According to an AARP survey, 2 of 5 Americans over the age of 45 do not have a written will. Without an up-to-date will, your estate will be settled based on the laws of the state you live in. Instead of you calling the shots on how your money and property get distributed to loved ones, an appointed administrator will determine who gets what.

If you already have inheritance documents, are they up to date? Were any of your children minors the last time you updated it (and are now adults)? If so, it’s probably time for an update.

Consider who you want as the executor of your estate. The executor is often a trusted loved one or friend, but for more complicated situations a lawyer or attorney may be more appropriate.

How important is it for you to not become a burden to your loved ones, and do you have the right insurance or savings level to prevent this from happening?

Did you know the daily cost of long-term care can be as high as $350 per day? That’s more than $127,000 per year. It’s easy to see how this can quickly drain your nest egg if you don’t have insurance to cover it. The need for long-term care can wipe a family out financially, leaving a spouse and children with little or nothing left to inherit.

Once the need for long-term care arises, there is little that can be done to avoid the costs. The right amount of insurance coverage and savings can help prevent a bad health situation from turning into a financial nightmare as well.

How will your debt affect your lifestyle?

Low interest debt can be very manageable, especially on a mortgage, where it’s very possible to earn a higher rate of return than you’re paying in taxes. Plus the interest can be a tax deduction. If you have excessive debt, however, you should have a game plan to address the issue, so that the interest and payments you’re making do not continually weigh down your cash flow or quality of life for longer than they have to.

The big question is, can you earn more money off investments, or save more on interest by paying off your debt?

Before answering this question, consider the nature of the investment, the risk involved with the investment, and the certainty of your debt. Sure, you may be able to earn a higher rate of return in the stock market than what you’re paying in debt, but the stock market is not a guarantee. In most cases, debt interest is. And if you choose to invest in stocks instead of paying off debt, you could lose value from a poor investment while at the same time paying regular interest.

Have you protected your income-generating assets from liability risks?

Accidents happen. Whether somebody slips on your property or you accidently rear end a stopped car, attorneys can get involved. Whether the accident was your fault or not, there’s always a chance you can get sued and lose.

Liability insurance, or more commonly known as “umbrella” insurance, can protect your assets and your family’s income streams if this ever happens to you. The old rule of thumb was to have a million dollar umbrella policy in place. Today, this number should be adjusted up to $3 million – $5 million, for most families, or more based on the value of your assets.

Is your income protected from disability or death?

We hate writing checks for auto and home insurance every month, until we get into an accident or a tree falls on our house. The same goes for our assets and income. Long term disability insurance can protect your income in case something serious happens to you, and you can no longer work.

Decide how much of your current income you need to insure. Is it 50%? 75%? 100%? You can insure a baseline of income you need for necessities and bills, or your entire salary to maintain your current income level.

The same holds true for premature death. The amount of life insurance you need depends on your family’s cost of living and future expenses, like college tuition, paying off a home mortgage, children’s weddings….etc. Keep in mind, it’s important to not only protect the primary earner’s life but also the primary caregiver for children. How much would it cost to replace what that person does on an everyday basis?

Thank you for taking the time to read our financial planning checklist. If you would like help addressing any of the items on this checklist please contact us at info@rebyadvisors.com or call (203) 790-4949.