Kenneth B. Petersen is an investment adviser and principal of Monterey Private Wealth Inc. in Monterey. He points out 10 financial planning necessities below. While I agree with Kenneth on each of these points, I have added my own comments at the bottom of each of the first 8 points.
1. Have a personal investment policy and investment plan. This should be obvious to you if you have been buying high and selling low, like in late 2008 or early 2009.
Whether your investments are in a regular brokerage account or a retirement account, you need a sound personal policy defining your goals, time horizon, and tolerance for risk. And if you don’t have a plan for allocating, diversifying, and choosing your investments you are making a serious and costly mistake. There are numerous studies that demonstrate the high price that amateur investors pay when they don’t have an investment plan and haphazardly buy and sell stocks and mutual funds at the wrong time, primarily when they are driven by fear and greed rather than good investment sense.
Failure to plan is planning to fail. Sticking to the plan is key to success. But, changing the plan may be necessary as circumstances change. Get professional, “fee only” advice to keep you on track.
2. Have a valid and updated will. Either you leave a valid will, or the state will dictate the distribution of your assets, and that may not be in accordance with what you want. In many situations you may also need a revocable living trust. Ask your attorney.
You have worked too hard to leave the distribution of your accumulated assets up to the state. If you have minor children, make certain to be sure they are taken care of.
3. Participate in your employer’s 401(k) plan. You are responsible for your own retirement funding, so don’t put it off. And be sure to contribute at least enough to earn the maximum employer’s matching contribution.
Some estimate that you and your employer must contribute between 12% and 15% of your wages to meet your retirement goals. Don’t sell yourself short.
4. Have a liquidity fund (money market account, CDs, etc.) equal to at least three months’ disposable income. Six months is even better. Don’t keep yourself on the edge.
In today’s economy six months’ disposable income may not be enough. Unemployment is high and the average length of employment is currently 9 months.
5. Have adequate life insurance to meet your family’s financial needs in the event of your death. Don’t be naive enough to believe that “it can’t happen to you.” Too many surviving families struggle to make ends meet because the breadwinner did not own life insurance. Accidents happen.
Declining term insurance may be your best choice. Amounts are highest when your needs are greatest (e.g. when you have dependent children) and the cost is relatively low.
6. Have a Section 529 college-funding program for your children or grandchildren. College expenses are rising at twice the rate of inflation, and college pays off. Studies show that college graduates, in general, earn more and lead happier lives.
Don’t “raid” your retirement assets to pay for college expenses. Keep the retirement assets growing for your old age. Start saving for your children and grandchildren when they are young.
7. Know your “full retirement age” and expected income from Social Security and pension(s) at retirement. How can you plan for retirement without knowing what you can expect from Social Security?
With the decline of defined benefit pension plans, Social Security will be your best friend. It is too important to take for granted. Very few future retirees will be able to retire before their “full retirement age” and that age may be pushed back because of the Social Security funding problems. Plan for the worst and hope for the best.
8. Have long-term care coverage as part of your health insurance program. Unless you are too poor to pay the premiums or wealthy enough not to need it, buy long-term care insurance before you get too old to afford the premiums.
Do you think that you can afford to have $70,000 per year in annual nursing home care? Insurance works best when the risk is small but the financial consequences are large.
9. Have a “living will” indicating actions to be taken (or withheld) in the event of illness or accident. Your loved ones shouldn’t have to make these decisions for you. Would you want to be kept on prolonged life support with no chance of recovery?
10. Have a durable power of attorney, giving someone the ability to make financial decisions on your behalf. You could end up spending a lot of money on court and conservatorship fees while your bills go unpaid.