4 Key Considerations When Protecting Your Financial Assets
The financial planning most people never get to? Phase Two.
From the time we enter “the real world” through the rest of our working lives, we get advice like: maximize your employer 401k match, build equity in a house instead of paying rent, have six months of income save up for emergencies, start an education fund for your newborn, fund your Roth . . . and on and on.
To be clear, advice to save and invest more of your money is not bad advice. In fact, without this first step to accumulate and grow your money, then the rest doesn’t really matter anyway. Plus, when it comes to the retirement calculator, most of us never reach the point where we feel we have too much money to retire on. We are all intent to grow our “nest egg” as big as possible, and that’s a good thing!
But for those who may have accumulated some assets, it is time to think about phase two: Protecting your assets.
Here are four key considerations:
1. Protect your largest asset.
Most likely, your home is your most valuable asset. And unless you bought your house with cash, your mortgage lender required you to take out homeowners insurance.
Most lenders, however, do not follow up later to ensure that you have updated the amount of insurance if the value of the home increases over time. When the housing market is good, the value of your house typically increases; but in most cases, your insurance policy does not automatically increase its limits with the increase in value. Should your home experience significant damage without this updated homeowners insurance policy, you may only be reimbursed for the amount covered by your original policy.
2. Protect your most important asset.
While not really an “asset” in the true sense of the term, your family is most likely number one on your list when thinking about protection. Life insurance is a great way to help your loved ones manage their finances, while retaining any other assets you have left them.
Especially if you are the breadwinner in your family—paying mortgage, school tuition, health insurance and basic living expenses—it’s important to have a plan in case the worst happens. Without life insurance, your accumulated assets will be the only source of income for your heirs. These assets can be depleted quickly without another source of funds. Life insurance can cover the lost income and allow your family to hold on to the assets you passed down so they are able to use them as you intended, rather than as an emergency savings fund.
3. Protect your current income.
No matter how immune you think you are, the reality is that more than 25% of today’s twenty-somethings will be unable to work due to an unforeseen dsaability before they hit retirement, preventing them from working and earning wages.
Disability insurance was built just for this. Most commonly, employer-sponsored disability coverage covers around 50-60% of your pre-disability income. In this scenario, if you go out on disability, supplementing the other 40% of your income will cost you your assets. To avoid depleting your assets, individual disability policies are available as supplements to your employer-sponsored coverage to make up the disability income difference.
4. Protect your future income.
As you near or enter retirement, investment risk becomes even more important. If you plan on relying on your investments for retirement income, then extended declines in the stock market can have a significant impact on how much money you have to live on.
The good news is there are financial instruments created specifically to protect against a decline in your portfolio and its future income. Various types of annuities protect you against big market swings plus guarantee1 you won’t outlive your income, solving two of the biggest concerns for retirees. Annuities aren’t right for everyone but they may be a good solution for you.
As we have all witnessed, a multitude of unforeseen events can change a family’s financial future in an instant. You’ve worked hard to save, invest and grow your assets so don’t forget to protect them before it is too late. A good financial advisor can create a personalized financial plan to help you achieve your goals including protecting your assets and your income. Make a plan today.
For specific tax advice, please consult a qualified tax professional.