Earlier, I discussed the first three things that I believe every person should get in order before even considering hiring a professional financial advisor. Today, I want to spend some time diving into the next three things I would tell someone to do who wanted to be in charge of their own personal financial plan.
4. Protect your income
5. Get your estate documents in order
6. Begin building wealth beyond your retirement accounts
Bob Hamilton, who started my fee-only financial planning firm, PDS Planning, Inc., believes that eventually, every decision comes down to money. I find a great deal of truth in that if you’re willing to suspend the argument about loved ones and our health, because as you must agree, those never come down to money, right?
Since money is so important, our ability to generate an income is critical to our financial success, therefore the 4th step is to protect your income, in case of death of course, but also in the (hopefully) unlikely event you are unable to work due to an injury or illness. This requires you to consider both life and disability insurance. For life insurance, I believe you want as much as possible, for the lowest possible cost from a reputable, financially-stable company. If you are buying life insurance to protect your family in the event of your untimely death (income replacement), then you should focus your research on term life insurance which is guaranteed to cover you for a set period of time. Be sure to find out if you can purchase this through an employer, an association you are a member of, or you may have to purchase it individually through a licensed insurance agent (or online). It is often sold in 10, 20, and 30 year guaranteed coverage periods as long as you pay the premium. Personally, I have always bought the 30 year coverage. Only in rare circumstances would I suggest permanent insurance is appropriate. Permanent life insurance often builds cash value, with the hope that one day you can suspend premium payments and it will maintain itself. I would not, under any circumstance, suggest it is a good vehicle through which to save or invest money. I strongly discourage this now because there are far too many investment options that offer much greater flexibility at significantly lower cost.
The only thing worse than dying and leaving behind a family with financial worries may be to suffer a disability that stops you from earning a living, thus leaving you to watch helplessly as your family struggles financially. Buying long-term disability income insurance (LTD) can mitigate this concern. Often, larger employers have group LTD that will pay you a set percentage of your income if you are unable to work due to injury or illness. I often suggest supplementing this with individual coverage, which is portable if you change jobs. If your employer does not offer group coverage, I feel strongly that you should buy individual coverage that provides a benefit amount that will allow you to pay your monthly fixed expenses. When buying coverage, you can manage the premium cost by extending elimination (or waiting) periods, and eliminating unnecessary riders that can drive up cost.
Continuing on the contingency plans path, next up are your estate documents. Making sure you have your assets titled properly, beneficiary designations are set accordingly, and that you have the appropriate documents to ensure your legal matters are handled in the event you die, or become incapacitated is critical. There are a few basic documents that we encourage all clients to have.
- Healthcare Power of Attorney (and a Living Will if your state authorizes them)
- Financial (or Durable) Power of Attorney
In addition to that, some folks, especially those with young families, can benefit from having a revocable living trust established. On occasion, a client will ask me if they can accomplish getting these documents set up by using Legal Zoom. I am sure many people have done it themselves on Legal Zoom, but for me, it’s worth the money to hire a professional attorney to get these documents done, correctly.
Retirement accounts such as 401(k)’s, Traditional and Roth IRAs are wonderful structures to help you save money. However, as you may be aware, they come with some “ease of access” issues. In most cases, these types of accounts are limited in how much one can contribute. Additionally, retirement accounts accessed prior to age 59.5 come with some tax penalty consequences. And as we are all aware, life doesn’t always follow a straight path. As life deals us a host of changes, it’s always a good idea to have some reserves to fall back on. In my previous post, I mentioned the importance of having 2-6 months of fixed expenses set aside in cash. That’s important, but now I am talking about building additional reserves outside of your bank account, and your retirement accounts. It has been my experience that the wealthiest people I know rarely have their retirement plan as their largest asset. It happens, but it is rare. Often, the lion’s share of their net worth is composed of a business interest, or rental properties, or maybe just a portfolio of non-retirement investments, such as stocks or bonds. The great value in having a long-term portfolio of investments outside of your retirement accounts is the fact that they usually offer a great deal of liquidity. Flexibility is my favorite trait in an investment. A portfolio of non-retirement assets can be used for many different objectives over your lifetime. No matter what you choose to do, building wealth in addition to your retirement plans will pay huge dividends over time.
This certainly is not a comprehensive list, but does touch on some of the basic building blocks of managing your own financial plan. It will take some time, but could save you significant professional fees as you build your wealth. However, if this appears overwhelming in terms of the time commitment, or the depth of content, then finding a trusted advisor may likely yield material benefits over time.