Objective information about financial planning, investments, and retirement plans

Do You Have a Back-Up Financial Plan?

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English: Green Bay Packers starting quarterbac...

In a recent Monday Night Football game against the hated Bears, Green Bay Packer star Aaron Rodgers went down with down with a game ending injury.  The second-string quarterback was Seneca Wallace who was at best an NFL journeyman with at best a checkered career.  Needless to say the Packer’s high-octane offense came to a grinding halt and the Packers lost a key divisional game.

Seneca Wallace in this fan’s opinion was not a credible back-up plan, but rather a joke and an insult to loyal Packer fans everywhere.  Regular readers of this blog know that I stress financial planning as a starting point for almost every financial endeavor you might undertake.  Part of a sound financial plan involves planning for the curve balls that life sometimes throws at us.  Here are some components of a solid back-up financial plan.

An emergency fund 

This represents very liquid savings that are set-aside for emergencies such as job-loss, the need to replace your furnace on the coldest day of the year, unforeseen medical expenses, and other unexpected events that have a way of popping up in life.  This is not money that is invested in stocks or mutual funds, but rather in a money market fund or a similar vehicle.  Liquidity and little or no risk of loss are key.  For example a CD that ties up your money for a period of time and assesses a penalty if you need it early is not a good vehicle for this money.  The rule of thumb is 6-9 months of expenses, your actual need will vary and you should look at your own unique situation.  If you don’t have enough right off the bat for an adequate emergency fund, accumulating this money should be a top savings priority.

Insurance

Regular readers of this blog know that I have a healthy skeptiscm of many insurance and insurance-based financial products and many of the folks who sell them.  However insurance is a key component of a financial plan for most people.  The key is finding a competent financial professional who will assess your needs and sell you the insurance product that is right for the risk that you need to insure.  I assist my clients in finding and working with insurance professionals of this type.

Life insurance is a basic component of a financial plan for many folks.  Insurance replaces some or all of your future income for your family or other beneficiaries in the event of your death.  It can help pay off the mortgage, send your kids to college, or fund the retirement for a surviving spouse if you haven’t had time to accumulate sufficient assets.  Even in the case of a non-working spouse it can replace the “services” he or she provides in terms of child-care and the like.  Life insurance can also be used as an exit strategy for a closely-held business or to offset the impact of losing a key employee.  All too often life insurance is sold for purposes other than providing a death benefit.  This is often in the form of some sort of policy that builds cash-value and for uses such as a supplemental retirement vehicle.  For many folks inexpensive term insurance is the best deal, be very leery of a pitch for whole life, Variable Universal Life, and the myriad or other cash value policies out there.  These are very lucrative for the agent, not always so for you.

Disbility insurance is perhaps more important than life insurance in that it provides coverage for an event that is more likely to occur than death.  This is “lifestyle” insurance and I generally urge folks who have access to it via the workplace to buy as much Long-Term disability insurance as possible.  These policies are not always great in that their definition of disability and own occupation is often broad.  Private policies will often have a narrower definition of your own occupation for purposes of paying a benefit, but these policies can be expensive.  On the other hand I’ve seen several high earning professionals over the years become disabled and having proper disability insurance has been a financial life-saver for them and their families.

Property and casualty and liability insurance comes in various forms and can help insure against all sorts of events that can occur on your property or in the course of doing business.  These range from personal polcies such as umbrella coverage against the UPS guy falling and hurting himself while delivering a package to your home to having sufficient auto liability coverage for yourself and perhaps younger drivers using your vehicles.  Professionals such as doctors, financial advisors, and lawyers need professional liability insurance to protect them.  Details on these and other types of liability coverage (both personal and professional) are beyond the scope of this article, but they are none the less a key part of a back-up financial plan.  One successful judgement against you or your business can bring financial ruin without proper insurance and asset protection planning.

Long-Term care insurance provides coverage for long-term health problems that can plague us later in life.  This might include a nursing home stay or home health care.  This insurance is complicated and expensive.  Whether or not buy Long-Term Care insurance, which features to buy, and many other decisions requires research and perhaps professional guidance.  The reason to consider this type of coverage is that the cost of caring for a loved one with a long-term health situation can be staggering and can wipe out the finances of a family.

Estate Planning 

Estate planning is all about ensuring that your assets pass to your desired beneficiaries in the manner that you intend.  A will naming a guardian for minor children is a must for parents.  Retirement plans and insurance and annuity products are passed on via a beneficiary designation so make sure these are up to date.  A trust may or may not be in order depending upon your situation.  An often overlooked factor are items such as a medical power of attorney and other similar documents that designate who can handle your affairs and/or make decisions for you in the event that you are incapacited.  Few of us will have to worry about paying estate taxes, but these other issues can be huge and if not handled properly can cause major financial headaches for your family and loved ones.

Accumulate wealth and become financially independent 

This is along the lines of “… the best defense is a good offense…”  Saving and accumulating wealth and building financial independence represent the best financial contingency plan.

Contribute to your 401(k) or similar retirement plan.  Investing for retirement via salary deferral is painless and doesn’t require you to do anything except make an election to have the money withheld from you paycheck.  Obviously you will want to make good 401(k) investment choices and you will certainly want to make good decisions with your 401(k) account when leaving a job.

Starting a business or investing in one is another way to build wealth.  Business ownership if managed properly can be a great way to accumulate and pass on wealth to your heirs.

If you’ve saved and positioned yourself properly over the years you’ll be like several of my clients who couldn’t wait to receive a buyout offer from their employer so they could retire and/or otherwise move on with their lives.

The items listed above are not meant to be an exhaustive list, but they do represent a good starting point to help you prevent a potential financial catastrophe.  I want you to be better prepared then the Green Bay Packers were at quarterback.

Check out the retirement planning calculator tool at the end of this post.  At the very least this will help you determine where you stand in terms of your readiness for retirement which can provide peace of mind in the event of a job loss or other unexpected financial life event.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your financial planning and investing questions including your financial back-up plan. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

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Asset Protection Tips for Real Estate Investors & Owners

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This is a guest post by Ike Devji, a Phoenix, AZ-based asset protection attorney and one of my oldest online friends.  I have spoken with Ike many times for advice on client asset protection issues and had the pleasure of meeting him in person a couple of years ago when he spoke to my financial advisor study group during a meeting we held in Phoenix.  Though Ike focuses on high net worth professionals and physicians as clients, his advice for “real estate owners, flippers, and developers” is applicable to anyone involved in the ownership of real estate.

Real estate management issues fall into several basic categories: debt, liability, and loss. We provide an introduction to these issues to help you get your house in order below. As many business owners and professionals also have investment in real estate outside their business itself, I’ve included issues of wide applicably.

Debt 

The nature of real estate debt and the significant guarantees that often accompany it can have grave consequences. We’ve covered some of these in detail including the effects of real-estate investments on financial solvency.

Make sure you clearly understand the limits and extents of the personal guarantees you sign. Many investors are signing as “jointly and severally liable” for 100 percent of the total debt when they only own 20 percent of the deal, as one example. Limit your liability share to your ownership share and understand if the loan you are signing for is a “non-recourse” loan or not.

Have your leases, indemnity agreements, and other legal docs drafted by a lawyer, or at least reviewed by a lawyer BEFORE you use them. Asking us what we think after the fact is useless. Always have these agreements reviewed by an experienced real estate attorney. Having your brother-in-law the DUI lawyer look at it could be the most expensive $500 you ever saved.

Don’t sign blanket personal guarantees, be specific in what you agree to collateralize as much as possible or the bank will value what you own at pennies on the dollar and try to take it all.

Get professional accounting help to maximize tax deductions. Use strategies like energy studies and cost segregation studies to reduce your fixed long term costs and maximize what you keep. Some real estate lawyers and accounting firms also offer “lease audits” these verify all the mysterious monthly expense add-ons you may face if you rent rather than own the building, the calculations are often wrong, and not in your favor.

Liability 

Protect yourself from your, clients or patients (or renters, their guests, and business invitees); you are liable for their health, welfare, and safety related to the property and conditions on it. Have specific leases, written policies on conduct and the use of the properties and penalties for violating them. Insure yourself to hilt against liability incurred on the property. You will almost always be more collectible and a better lawsuit target than your renters. That said, don’t ever forget that insurance alone is just one layer of defense and is not adequate protection.

Don’t put too many eggs in one basket. Divide properties based on use, equity, and danger or liability. If you have multiple pieces of property in a single LLC, for instance, remember that ALL of them are potentially at stake for an exposure at one property.

Implement personal asset protection planning and consult with legal counsel on how you are protected and which of your other personal assets are at risk and should be made legally distinct. If he or she says, “just by more insurance” fire them and get better help.

Loss 

Adequately insure yourself against loss and property damage, as distinct from liability. Use only top rated national carriers that you can sue for bad faith if they don’t pay under the policy as they should. Yes, this is common, “bad-faith” lawyers exist for a reason. Remember that vacant property is often not covered by general loss and liability insurance after as few as 30 days if you don’t let the insurance company know and pay them extra.

Get ALL the right insurance. If you are a owner/manager you need general liability, E&O (like professional malpractice), and potentially D&O insurance (directors and officers) if you are a director or officer of a company that may be personally named for professional acts or omissions, i.e. “I made the call that reinforcing the balcony railing was too expensive and not required at the property…”

As always, act today, anything you do after an exposure is more expensive and less likely to work. Be proactive and tactical in defending what you have earned.

Attorney Ike Devji has a decade of practice devoted exclusively to Asset Protection and Wealth Preservation planning. He works with a national client base including 1000’s of physicians and business owners often through their local attorney, CPA or financial advisor. Together, he and his associates protect billions of dollars in personal assets for these clients. Ike also regularly writes, teaches and speaks on these issues to executives, physicians and other professionals nationally. See his work in WORTH, Advisor Today, Physician’s Practice and at www.ProAssetProtection.Com

As always, the information presented here is general and educational and can never replace the advice of experienced counsel specific to your assets or situation. 

Please feel free to contact me with your financial planning and investing questions. 

Please check out our Resources page for links to some additional tools and services that might be beneficial to you.

Photo Credit:  Wikipedia

 

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Life Insurance – You Probably Need It

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Jeff Rose, a fellow financial planner and blogger, has started another movement on his blog Good Financial Cents.  Jeff is committed to raising the awareness of the need for life insurance in general and especially among younger families.  Overall it is estimated that 35 million households don’t have any life insurance and another 58 million households that do have some coverage feel that they are underinsured.

As a financial planner I am convinced that life insurance coverage is a key element in the financial planning process.  Not all clients have a need for it, but it is always something that I look at.

You have young children and a non-working spouse.  I can’t tell you how many young professional couples that I have encountered who either have no life insurance or far too little insurance.  Often I will get a call from a high earning young professional who is eager for guidance on investing and perhaps in buying income property.  However when I ask them about the basics such as life insurance or a will the answer is all too predictable.  They haven’t paid any attention to these key protection elements.

In this case life insurance is an essential element of this family’s financial plan.  If the breadwinner spouse were to die, how would the mortgage be paid?  Assuming the non-working spouse needed to return to work how would childcare be paid?  How would the non-working spouse accumulate enough funds for both retirement and college?

Life insurance is an essential element in this family’s financial plan.  Life insurance can also be critical in a variety of situations.  Here are some examples from my experience in working with clients.

  • Life insurance allows the non-working spouse time to make decisions about the future.  While the death benefit might not last a lifetime it allows time to decide upon whether or not work, time for career training, what to do with the house, and other key decisions.
  • Life insurance is an easy, inexpensive way to build an estate.  Whether a younger family that has not had the time to accumulate assets or a mid-career person who has not been able to save, a life insurance policy can be an excellent way to fund expenses such as college, retirement for a spouse, or to simply provide a financial cushion for your survivors.
  • Life insurance can provide continuity for a business in the event of the death of one of the owners.  Life insurance is commonly used to fund a business buy-sell arrangement.  Under this type of arrangement, the proceeds of the policy are generally used to buy out the interest of the deceased owner and to provide a payout to their family.  This avoids the awkward situation of the remaining owners having to work with a surviving spouse who may have had no involvement in the business previously.

In buying life insurance I always advise clients to look at it for the death benefit first.  Some agents will tout various types of cash value policies as an investment tool or as a means to take money (the accumulated cash value) out of the policy tax-free in retirement.  In general I’ve found that life insurance is an expensive route to go if one is using it as an investment vehicle.

While these types of policies may have their uses, for most people term insurance is the way to go.  Term insurance will provide the least expensive death benefit.  There is no cash that accumulates in the policy and coverage will cease if you stop paying the premium.

For most folks that I encounter, however, buying the largest death benefit is the main reason to buy the insurance.  Two points about term insurance:

  • Term policies often come with a guaranteed level premium period.  This means that the premium remains fixed for a period of 10; 20; or 30 years.  For a younger family I would advise at least a 20 year level policy and perhaps a 30 year term.  Think through how long you might want to have insurance in place.  Also realize that your situation may change in the future and you may want a policy but be unable to obtain one due to changes in your health.
  • I work with clients to review their policies every few years.  Term rates change and we have been able to obtain policies with a larger death benefit in some cases without much increase in premium.

Life insurance often gets a bad rap.  It’s probably not so much that people perceive insurance as a bad product, but rather it’s the way it’s often sold.  If you work with a competent financial professional they can assist you in determining how large a death benefit to look at and other factors to consider.

Please feel free to contact me with your insurance and financial planning questions.

 

Photo credit: Christopher S. Penn

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