The Dollars and "Sense" of Protection
If you're like most people, you've worked hard over the years to accumulate assets and achieve your family's current standard of living. As a result, you probably take important steps to protect your valuables and other tangible assets. Certainly, most people understand the value of automobile, homeowners, and other insurance coverage for items of significant value. While tangible assets such as cars, homes, and jewelry may be worth a considerable amount of money, their income-producing value is often negligible. Your true wealth, and perhaps your greatest asset, is your future earnings potential.
If you're the main provider, your family may depend on you to make mortgage payments, save for retirement, and fund your children's education, in addition to maintaining your current lifestyle. Although you may be comfortable with the insurance coverage you have for your most important tangible assets, have you considered the amount of insurance coverage you have in place for something a little less tangible—namely you? With this in mind, let's take a closer look at how you can estimate the financial needs of your family in the event of your death.
Suppose you're 35 years old, earn $50,000 per year, and have $100,000 of life insurance coverage. In addition, you and your spouse have calculated that you'll need to work 30 more years to meet your financial goals and objectives, which include paying off your mortgage, sending your children to college, and building adequate retirement savings. If you multiply your current earnings by 30, you get a very rough estimate of your future earnings—$1,500,000.
Don't let this figure startle you. It's not how much life insurance you need. However, it does indicate the important impact you have on your family's ability to meet its financial goals. There are a number of factors that need to be considered to objectively determine an adequate amount of life insurance coverage.
The first is whether your life insurance proceeds are sufficient to help pay the remaining mortgage on your home. In addition, many parents want life insurance proceeds to help cover their children's future college expenses. The amount needed can be calculated by matching the ages of your children against projected college costs adjusted for inflation. Next, would your spouse's income be sufficient to cover your family's current monthly expenses. Providing a supplemental income fund can help your family maintain its standard of living. Finally, life insurance can help provide liquidity at death to pay estate taxes and maximize asset transfers to future generations.
Remember to assess your existing policies by calculating the additional coverage you may need based on your family's financial obligations and any other resources, such as retirement benefits and savings.
Before you crunch the numbers, it's important to realize that determining life insurance needs is not as simple as it may appear. Be sure to consult with a qualified insurance professional to help ensure that you have an appropriate amount and type of coverage.
Easing into Retirement
For many people, crossing the bridge into retirement is a big step. After spending years building your career, you've probably accumulated a nest egg along the way. If you're approaching retirement, it's time to develop a strategy to facilitate a smooth transition from the world of work to the world of leisu re. While retirement planning usually focuses on preparing for your financial future, nonfinancial issues may also need to be addressed. When retirees report feeling dissatisfied with retirement, it's often the nonfinancial issues that are the culprit. Specifically, lifestyle changes, as well as self-esteem and identity issues associated with the loss of one's profession, tend to create the most difficulties.
Stay Active
One possible solution for managing these challenges may be to slowly ease into retirement. Some individuals may welcome the opportunity to continue some form of work, such as consulting, job-sharing, mentoring, or back-up management. Mentoring, in particular, enables an individual to transfer a lifetime of learning and experience to a friend, relative, or younger colleague. Phased-in retirement provides an "anchor," allowing new retirees to explore other activities while also maintaining the meaningful role in which they have grown comfortable.
From a psychological standpoint, some people find that separation and disengagement from a lifetime of work is more emotional than they expected it to be. Experience suggests that it might take between two and five years to "decompress" from the personal investment required of work-related activities.
Maintain a Healthy Perspective
Perspective is an important factor in enjoying the retirement years. While "retirement" suggests the end of your working life, a more positive perspective suggests the beginning of a new phase of life—a phase in which you can do all the things you never seemed able to find the time for while you were working. For example, volunteer work can allow you to make a valuable contribution to a charitable cause and meet new people. Taking courses in areas that interest you can sharpen your intellect and help maintain your cognitive abilities. If chosen thoughtfully, these activities can be enjoyable and fulfilling.
Obviously, it's a lot easier for a retiree to minimize work and begin considering other pursuits if financial considerations are secondary. People tend to think that it costs less to live in retirement. However, it's actually common for retirees to choose to increase, rather than decrease, their expenditures, especially in the first few years of transition. Without working full-time, retirees may have more energy and time to enjoy entertainment, dining out, travel, and recreation.
Keep an Eye on Spending and Inflation
During the working years, it's common to take a certain lifestyle for granted. In retirement, with more time available for reflection, it may be appropriate to assess how you have been living and prioritize your various activities. Depending on your circumstances, you may need to change your priorities or consider budgeting. On the other hand, you may find that you no longer need or want to do some of the things that seemed so important when you were working.
Additionally, be sure to keep an eye on the effects of inflation after retirement. For example, an item costing $100 when you're age 65 will cost $180 at age 80, assuming a 4% inflation rate compounded annually. Therefore, it's important that your retirement plan be not only a plan "at" retirement, but also a plan continuing "through" retirement, which may require revision on a regular basis.
If you view retirement as your opportunity for growth and exploration, you can make this transition exciting and enjoyable. Your horizons are limited only by your imagination. After all of your hard work, you've earned this opportunity—enjoy the freedom!
Savings Tips for Young Adults
Today, young adults face a variety of challenges in their pursuit of financial independence. Some of these challenges are similar to those faced by previous generations, while others are unique to the times. If you're a young adult, consider the following five financial tips to help you manage your money and prepare for your future:
1) Invest in your future. Rapidly changing technology used in various fields may require continuing education. You may wish to make ongoing education a priority to enhance your skills and increase your professional potential. The more varied and flexible your skills, the more you'll have to offer to prospective employers.
2) Open an emergency savings account. The uncertainty of the workplace may mean that your professional life will be interrupted by career changes. If you need to return to school to change career paths, you may experience periods of time without steady income. Creating an emergency fund to cover six months' worth of living expenses can help you manage work-related transitions. This savings fund may also be used for other endeavors, such as starting your own business.
3) Save early and continuously for retirement. Saving for retirement is your responsibility. The more disciplined and diligent you are, the better off you may be. Social Security provides only a base level of income, and many employers no longer offer traditional pension plans. With employer-sponsored 401(k) plans, the responsibility of saving rests on your shoulders. Although you may be years away from retirement, the key is to make time and compound interest your allies.
4) Let retirement funds accumulate. If you change jobs early or often, consider rolling over your employer-sponsored retirement plan funds into an Individual Retirement Account (IRA) or new company retirement plan. It may be tempting to cash in the account, especially if you have accumulated only a small amount, but doing so would make it immediately taxable, and you may also incur an early withdrawal tax penalty. Perhaps a greater concern, however, is that you may be unable to make up for time already spent to accrue these savings.
5) Use credit wisely. Credit card companies frequently target young adults with the lure of "easy money." While credit cards offer convenience (it's virtually impossible to conduct some transactions, such as reserving airline tickets, without one), they also have the potential to create debt problems. Because payments can be extended far into the future, overspending on credit can create an illusion of wealth. Paying off the full balance each month is the best way to manage your use of credit.
Remember, the funds you accumulate during your working years may be your primary source of retirement income. Although inflation can erode your savings over time, a little discipline and common sense may help you better manage your current and future financial affairs.
Prepay Your Mortgage and Save
Is reducing the length of your mortgage loan by accelerating your mortgage payments the right decision for you? Prepayment can save you money, particularly if you plan to reside in your home throughout the life of your loan.
Suppose you have a $200,000 mortgage at 7% for 30 years, your ordinary monthly payment (excluding real estate tax) is about $1,331, payable for a total of 360 months. The mortgage will ultimately cost you an estimated $479,022, which includes $279,022 in interest.
If you pay $50 extra per month (about $1.64 a day) toward that mortgage, you'll cut your total interest payment to approximately $242,597, and you'll own your home without a mortgage three years and three months sooner. In other words, the extra money you pay out at the rate of $50 a month will save you an estimated $36,430 in interest.
Obviously, the more money you prepay, the greater your savings. For homeowners who have adjustable rate mortgages (ARMs), the practice of prepaying is especially wise when interest rates are low. Prepaying reduces your debt load if rates go up later, since interest payments are highest and principal payments are lowest at the loan's inception.
Is there a downside to prepayment? It depends. Eventually, you'll eliminate the income tax deduction you receive from deductible interest paid. Depending on your tax bracket, the amount of money saved should be reduced accordingly. In addition, if you know you'll only be living in your current home temporarily, prepaying may not be as beneficial in the long run. It's important to thoroughly analyze your options before you proceed.
Another area of concern can be prepayment penalties. While once common, they may be limited or nonexistent on relatively new mortgages. Also, the competitive nature of lending has led banks, in some instances, to waive penalties and prepayment charges.
Before proceeding with any type of plan, consult with your financial professional to ensure that your decisions are consistent with your overall financial goals and objectives.
A Parting Thought...
Many individuals put off planning their estates. Perhaps this is due to a misconception that estate planning is only necessary for people with significant assets or involves tax planning, which can be done "later."
The fact is that, regardless of your level of wealth and the ultimate tax consequences of your estate, solidifying the future of your family is probably high on your list of priorities. That is why a well-structured estate plan is invaluable. Through it, you can control the distribution of your assets and possessions, name guardians for your children, and plan care for other dependents. There is no better time to start planning for your family and heirs than today. Individuals involved in the estate planning process should work with their estate planning team, including their own personal legal or tax counsel.
The information contained in this newsletter is not intended as tax, legal, or financial advice, and it may not be relied on for the purpose of avoiding any Federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Written and published by Liberty Publishing, Inc. Copyright © 2011 Liberty Publishing, Inc.