In the front window of the bike store near my home there's a big sign that reads, "FREE LIFETIME TUNE UPS!" When you buy a bicycle, as I did recently for my daughter, you can bring it back anytime for a free tune up. Having a tune up at least once a year is a great way to keep your bicycle in top working condition. A few weeks ago, I brought my wife's and my own bicycle in for a tune up. Unlike our daughter's brand new bike, ours were covered with dust and cobwebs. The handles were chewed up and needed to be replaced. The tires were old and flat. But once our bikes were tuned up and everything that needed to be replaced was replaced, they were as good as new.
Last night, as I was driving by the bike store, I noticed the "FREE LIFETIME TUNE UPS" sign and I began thinking about the similarities between tuning up a bicycle and tuning up people's financial affairs.
At first I thought, "Why would a bike store offer free lifetime tune ups?" There are a number of good reasons. First, it gets their clients thinking about the need to keep their bikes tuned up, in good working order. Second, it tells clients that they'll be there for the life of their new bicycle. Third, it encourages their clients to come back year after year for tune ups, parts that need to be replaced, bike-related equipment (helmets, racks, water bottle holders) and new bicycles.
Your financial affairs are lot like a bicycle. You need to have all of the right parts, and each part needs to be in good condition and work together to provide you and your family with a smooth ride through life. And just like your bicycle (and your automobile), you should have a financial tune up on a regular basis, at least once a year.
Getting Started
Like my old bicycle, your wills, trusts and insurance policies might be covered in dust. They're probably sitting in a drawer or filing cabinet and haven't seen the light of day in years. You might not even know where they are, but do your best to find them. Collect all of your wills, trusts, home and auto policies, life, health disability and long-term care policies. If you've ever had a written financial plan prepared for you, you should get that out as well, although it is probably outdated and obsolete.
In case you're wondering why I have not yet asked you to gather documents and information pertaining to your investments, it's because at this point in your financial tune up, that information is less important.
Many people believe that the primary reason to work with a financial planner or advisor is solely to improve their investment performance. That assumption is not only wrong, it's also dangerous to your financial health and security. The most important reason to work with a financial planner is to make sure that you and your family remain financially secure. Market-beating investment returns won't do you much good if someone in your family causes a fatal automobile accident and you don't have adequate auto insurance or an adequate umbrella policy. Investment returns won't help you or your family if you become disabled or terminally ill.
Proper insurance planning is the only thing that can ensure your family's financial security in the event of death, illness, disability or a catastrophic event for which you or a family member are held liable. That's why it's the first and most important step in the financial planning process.
No one likes to talk about death, illness or disability, and no one enjoys buying insurance. But each is a reality of life that must be addressed. If you love and care about your family, you will want to make sure that you have adequate insurance protection.
Evaluating Your Insurance Needs and Policies
Now that you've found all of your important documents, take a look at each insurance policy and ask yourself the following question: "Do I still need this insurance policy?"
If you drive a car, you need auto insurance. If you own a home, you need home (and earthquake) insurance.
If you have a mortgage, you may want mortgage insurance or enough life insurance to pay off the mortgage in the event of your untimely death.
If you have substantial assets, you need a sizable umbrella policy.
If you own a business, you probably need business liability and overhead insurance.
If you have partners, you will probably want insurance to coincide with a buy/sell agreement or any business succession planning you may have (and should have) done.
If you have a spouse or dependants whose lifestyle, income, financial security and independence would be affected by your untimely death, then you need life insurance.
If you have a spouse or dependents whose lifestyle, income, financial security and independence would be affected by your untimely illness or disability, then you should have disability and/or long-term care insurance.
If you don't think you need one or more of your old policies or are unsure, I recommend that you consult with your insurance agent to confirm that you do or don't in fact need the insurance coverage. If it's determined that you don't need some of your old policies, your insurance professional can help you determine the best way to convert or terminate any unneeded policy.
If you've discovered that you have a need for a specific type of insurance but have not yet obtained coverage, you should consult with your insurance agent to confirm the need, determine how much insurance is needed and obtain the best, most cost-effective coverage.
If you've determined that you still need some or all of your old insurance policies, you are ready to ask yourself the next series of questions:
"Do I have the enough insurance? And do I have the best, most cost-effective coverage?"
Because insurance companies are always coming out with new and better products, and constantly re-pricing their products, it's important to review your insurance coverage at least annually. Although most people would assume that a 20-year term policy purchased today would cost more than the 20-year policy purchased a few years ago, that's not always the case.
According to the June 26th issue of Investment News, "Competition, longer life spans and internet sales of term life insurance are lowering premiums to the point where it might make sense to replace older policies with new ones." The optimal age group for replacing a term policy is individuals ages 30 to 50, where savings of 25 percent are often possible. The article mentioned one individual who was able to purchase a new 20-year term policy for the same annual premium as the 20-year policy he had purchased eight years earlier, even though he was eight years older. So if you have an old term policy or one that you purchased in the past year, it might not hurt to find out if you can obtain the same coverage at a lower cost or additional coverage for the same cost.
In the case of whole life or universal life, it might also be possible to find newer, better or more cost-effective policies. Maybe not, but it never hurts to look. You also want to make sure that you have enough insurance.
In the past, I've written articles on how to buy term and permanent insurance in which I emphasized the fact that you need to know when, where and why buying the cheapest insurance is often not the best thing to do. When buying term insurance, it's critical to buy a policy with a long period of convertibility from a company that has high quality permanent policies to which you can convert if you want or need to. When buying permanent insurance, it's important to buy from a solid, highly-rated company and to know everything about how your policy works.
Estate Planning Issues
Next, let's take a look at your wills and trusts. If you don't have any, you probably should. If you die without a will or a living trust, your estate will have to go through probate, which can be costly and time consuming. If your estate is large enough that it would be subject to estate taxes, the absence of a will or living trust could subject your beneficiaries to excess, possibly unnecessary taxes. And if, at the time of your death, you failed to name beneficiaries for your IRA, it, too, will have to go through probate and be liquidated within five years. Had you named IRA beneficiaries, they would have been able to split your IRA and take required minimum distributions based on their individual life expectancies--creating more wealth for them and less for Uncle Sam.
So, it's my recommendation that you have a will and a living trust, and that you update them at least annually to ensure that your estate plan continues to reflect your goals and values, as well as any changes in tax laws. You should have beneficiaries named for your life insurance policies and your retirement plans, and they, too, should be updated regularly. Don't assume that you don't need to complete or update any beneficiary form just because you've updated your will and trust. If you have an IRA beneficiary named on the beneficiary form and a different beneficiary named in your will, the person named on the beneficiary form will inherit your IRA. You would not believe how many insurance policies and retirement plans are left to individuals who were not intended to receive them including ex-wives and boyfriends. Don't cheat your intended beneficiaries by failing to complete or update your beneficiary forms.
If you've been reading my newsletters, you know that I specialize in identifying common IRA and qualified plan-related mistakes and oversights that can cost you and your beneficiaries a fortune in excess or unnecessary taxes and ruin your family's retirement and estate plans. I also specialize in the implementation of specialized strategies that have saved clients and their beneficiaries a fortune in taxes and increased the magnitude and longevity of their wealth. Ed Slott (one of the nation's leading IRA experts) refers to this kind of planning as "Estate Planning for Your Retirement Assets."
Because most estate planning attorneys are not IRA and retirement plan specialists, most do not (and cannot) provide the same kind of planning that I provide. If you have substantial retirement plan assets or stand to inherit a large IRA or qualified plan, it would benefit you and your family to have me review everything related to your family's IRAs and qualified plans including plan documents, custodial and beneficiary forms. By assisting you and your family with your retirement distribution planning, I can help you avoid common, costly mistakes and oversights, minimize taxes and parlay your retirement plans into greater wealth.
Although the IRS used to forgive a number of common IRA-related mistakes (like failing to do a rollover within 60 days), they have become much less forgiving, established strict penalties and raised their fees for private letter rulings. Did you know that the penalty for failing to take a required minimum distribution is 50 percent of the amount that was supposed to have been distributed? If you or a parent or grandparent name the wrong beneficiary or fail to implement specialized tax-saving strategies, it could cost you or your loved ones a fortune in excess or unnecessary taxes. You might also, in the worst-case scenario, end up causing the inadvertent liquidation of your IRA or qualified plan. In almost every case, it's worth spending a few thousand dollars today for specialized planning that can save you and your family from thousands to millions of dollars in taxes and increase the magnitude and longevity of your family's wealth.
Investment Issues
Okay, now it's time to take out your bank and brokerage statements. The first question to ask yourself is, "Do I have enough liquid assets to sustain my family and me in case of an emergency such as the loss of a job, illness or a disability.
Most disability policies have a 60 to 90-day period before benefits are paid, so it's generally a good idea to have an emergency fund equal to three to six months worth of expenses.
Once you've established how much money should be maintained in your liquid emergency fund, you might find that you have too little or too much in safe, liquid assets. If you have too little, you will need to find a source of additional funds for your emergency fund. If you have too much of your money in safe, liquid investments (such as Treasury bills, CDs and money market accounts), you may want to consider allocating some or all of the excess to more growth-oriented, longer-term investments.
Next, you should examine your overall investment portfolio. Are your investments appropriate for your goals and risk tolerance? Are you overweighted in any particular investments or asset classes? Are the assets allocated tax-efficiently? High turnover mutual funds and investments that you might trade frequently should be in tax-deferred accounts. Tax-favored investments like municipal bonds and stocks that pay dividends at 15 percent should be held in taxable accounts. Never hold a municipal bond in a retirement account!!
Get Help
As you can imagine, the topics I've covered so far are only some of the issues that should be addressed in your financial planning and reviewed regularly as part of your financial tune up. Other issues include cash flow, debt management, charitable gifting, education funding and retirement planning.
Make no mistake about it, financial planning is complex. Without professionals to assist you with your tax, insurance, estate, investment and retirement distribution planning, you are far more likely to make a critical, potentially costly mistake or oversight. I recommend that you work with professionals and that you keep your legal and financial affairs up to date and in order. At least once a year, get or give yourself a financial tune up.
Rich Winer is the president and CEO of Winer Wealth Management, Inc. ( www.winerwealth.com ). He provides wealth management and financial planning services to individuals and families in Los Angeles and throughout the United States. Rich specializes in helping individuals nearing or in retirement to implement personalized strategies to protect and preserve their retirement savings, minimize taxes and increase the magnitude and longevity of their wealth. He is a charter member of Ed Slott's Master Elite IRA Advisor Group, an invitation-only group of IRA and retirement distribution planning specialists. He is often mentioned or quoted in financial publications like The Wall Street Journal and Financial Planning Magazine.
For more information, you may contact Rich at rich@winerwealth.com or call (818) 673-1695.
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