(Insurance, Retirement, Home, Education)
As the Easter holiday season rolls around and you start thinking about beach limes, trips abroad or simply, an Easter egg hunt, our Financial Advisors urge that you take some time out over the long weekend to assess your financial situation, to avoid sinking into more expenses from holiday spending. Getting yourself on sound financial footing is of paramount importance and financial security would not happen by accident, but by careful and deliberate planning. As you take some time out this Easter weekend, we recommend that you focus on four important areas: insurance, retirement, managing household expenditure and education financing.
You should dedicate some time to reviewing any life insurance policies you have, or doing research on these products if you don’t already own them. One major issue with life insurance is that people usually underestimate the potential loss from the death of the policy owner. Many employees receive group term life insurance as an employer-provided benefit. Often, the amount is modest, maxing out at several times one’s monthly salary, depending on the company and the employee’s position. However, this amount will not provide the same standard of living many families enjoyed prior to the policyholder’s death.
A great way to mend this will be to use a Needs Analysis approach, where you evaluate the family’s most important financial obligations and goals, estimate the income available after the person’s death and then attempt to estimate any deficit in the amount of annual income desired, which is then used to estimate the amount of insurance needed. This leads to planning insurance coverage to help address mortgage debt, college expenses, and future family income, as well as to provide liquidity for meeting future liabilities.
When retirement schemes were first introduced at the end of the 19th century, retirees were lucky to live just a few more years after stopping work. However, increased life expectancy means that today’s retirees are often enjoying 20 to 30 years of leisure at the end of their working lives. This means that ‘ideal’ retirement planning has become more important for a continued standard of living. You should review your retirement plan to ensure that you have in place an ideal plan for your retirement. Barclay’s Wealth Insights 2010 has identified five requirements for an ‘ideal’ retirement investment as follows:
- Safe. Investments need to be ‘safe’ from financial market collapses but they also need to provide for an individual living for a long time.
- Decent returns. Returns need to be ‘safe,’ but still good enough to make sure the individual does not have to accept a lower standard of living.
- Tax efficient. An obvious one, but which some people do not pay enough attention too. There may be choices to be made between the taxation of income and capital.
- Flexible. Clearly desirable, if the individual has to meet unexpected expenditures. But flexibility must not preclude the investment’s ability to provide adequate returns over a long period of time.
- Inheritable. If the investor dies prematurely, they may want at least some of their investment to be made available to their family. This is a particular problem sometimes with annuities or many forms of pension plans.
Also, if you have saved very little toward retirement yet you want to retire soon, options are more limited at this stage. The Financial Planning Association recommends you:
- Reduce expenses and invest the savings
- Increase income through a second or better-paying job
- Maximize your retirement plan contributions
- Invest more aggressively, but not recklessly
- Postpone retirement or retire part time
- Make smart withdrawals from retirement accounts once you retire
Planning for your home goes beyond home ownership, but also looks at how you manage your finances for the household to ensure that you maintain a roof over your head. Ideally, everyone should strive to save at least 10 percent of their salaries each year. This may not always be possible, as we all have months where we need to spend more than expected on unforeseen expenses, such as appliance repairs or medical emergencies. However, when this happens, you should try to cut back much more the following month so that you can remain on track with your savings.
In addition, you should take time to review your home budget and consider your spending habits. Do you really need the cable television super movie package, the expensive nights out at fancy restaurants, or the high-end brand name clothes? All of these should be considered only after you have developed a sound savings plan to achieve your future goals. You can start with a very small amount now and grow as your income increases, but the importance is on starting today and making it a priority.
Financing tertiary education expenses for one’s children is a growing and important financial objective for many people. Education costs are high and generally are rising faster than the rate of inflation. Education costs can create considerable strain on a family’s financial situation, when other significant financial needs may be emerging. It is important to assess and plan from now for such a significant expense. To roughly estimate future education costs and funding needs, one should take into consideration:
- The type of program, its length in years, and its current net cost per year
- An estimated average annual compound rate of growth in costs
- The number of years until the program starts
- An estimated average annual compound after-tax rate of return on assets set aside for education funding
By starting a disciplined savings plan now, one is better positioned to meet the future education needs.
Ultimately, there is a significant amount of areas to review when it comes to your personal financial plan. However, we have identified four main areas that you can tackle over the Easter holidays to ensure that you are in good standing. By addressing these areas you will be well on your way to building a secure financial future.
If you need further assistance, come in and speak to a Financial Advisor at UTC to develop a comprehensive financial plan suitable for you.