Strive to have a realistic financial plan that takes a holistic approach.
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Many people spend more time planning a vacation than they do their financial lives. When going on vacation, we consider such things as travel, accommodations, activities and – hopefully – a budget. We study the weather, arrange for care of pets, place a hold on the mail and many other things. We try to consider anything that might happen during the week or two we will be away.
When it comes to finances, many people plan only to try to earn the highest possible rate of return. It is often like they are planning a trip to the casino. They know that over a long time frame, the stock market often produces the highest return.
Responsible gamblers know that the odds are not always in their favor and they know how much money they can afford to lose. Good gamblers might pull some winnings off the table so they are playing with the house’s money. Many investors stay all in. They may not only have some evening’s fun money at risk, they might have their whole financial life at risk.
Some people believe this investment plan is a financial plan. It is not. Financial planning is much more holistic and is an assessment of every aspect of a person’s financial life, versus investment plans that view each goal as isolated.
Holistic planning changes depend on your stage of life. A younger worker must make sure he or she is protecting the most valuable asset: the ability to earn a living. Their earnings potential might be $1 million or more. A surprisingly large number of people suffer lost earnings earlier than expected because of sickness or injury.
A financial plan must consider the amount of insurance necessary to protect the family. A young worker with a family might need life insurance to provide income, pay off a mortgage or provide a college education in case of an early death. A senior citizen might need to have insurance to provide retirement benefits to a spouse to make up for lost pension and Social Security income upon the first death.
When one spouse dies, income could be cut in half. Living expenses go down very little. You still have to pay property taxes, heat the house and repair the roof. You do not get charged half the cost just because only one person is living in the house.
It also might be a way to leave a larger legacy to family or a charity. Many policies now provide living benefits that might help with something such as long-term care.
Investment return is the sum of many elements. It is proper asset allocation, risk management and diversification. The timing of when you need the money also is critical. There is never a good time to deal with a stock market crash; however, there is a worst time. That is right before or early in retirement. Sequential loss could wipe out your savings in this situation.
It is also very important to include health-care expenses in any financial plan. They are the No. 1 reason people in their early 60s and late 50s often cannot retire. Even when on Medicare, some people take prescriptions that could cost thousands of dollars per month out of pocket.
To put your family in the best position possible, have a realistic financial plan that takes a holistic approach. This will give your family the best opportunity to enjoy a satisfying financial life.
Gary Boatman is a Monessen-based certified financial planner.
He is author of “Your Financial Compass: Safe passage through the turbulent waters of taxes, income planning and market volatility.”
To submit columns on financial planning or investing, email Rick Shrum at rshrum@observer-reporter.com.