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Your Roadmap to Financial Wellness A comprehensive financial plan should address the following goals:
Retirement savings include pension, 401k, 403b, Individual Retirement Account (IRA), Simplified Employee Pension (SEP), and Keogh plan. The last two are for the self-employed and unincorporated businesses. Your IRA should be structured to fill the gap between how much you would like to have in your investment pot upon retirement and the total amount you would have actually accumulated in all of your other retirement portfolios at that time. In a future post, I will present a detailed retirement plan which answers the question “will I have enough money saved up when I retire?”
Education investment is for your young dependents. It is an important way to avoid the financial embarrassment of the escalating cost of post-secondary education in the future. Fortunately, saving for college or vocational education has never been easier since Congress passed the 529 Plan, a tax-advantaged education savings program. Your contributions to, and income earned in, a 529 Plan are tax-free as long as the funds are used to pay for education-related expenses. The earlier you start a 529 investment, the better. Your financial adviser or mutual fund manager can help you with this. For more on 529 plans, go to www.savingforcollege.com.
Life insurance is designed to fill the gap between how much wealth you have already accumulated and how much financial liability your dependents would incur if you suddenly pass away. A good investment program should cause your wealth to increase over time and therefore, make the need for a life insurance to decrease with time. You should consider purchasing a life insurance if (1) you have an earned income; (2) you have dependents such as spouse, children, and parents; and (3) your dependents will suffer a financial hardship in the event of your untimely death. If life insurance is right for you, only a renewal term life policy makes sense. The face value of your policy should approximate how much your dependents would require to pay for outstanding financial obligations – such as children’s education and upkeep, home and household expenses, and current family debt.
Estate planning and property inheritance can be met by setting up a will or better yet, a living trust. I prefer living trusts. They are simpler and cheaper. Unlike a will, a living trust bypasses the costly and time-consuming process of probate. However, similar to a will, it spells out exactly what your desires are with regard to the distribution of your assets after you pass away. A living trust is set up by you (the grantor). Note that if you pass away without a will or living trust, your property will go to probate and the courts will make the decision as to who gets what. Is that what you want? For more on this, go to Trusts for Dummies at www.dummies.com/how-to/content/what-is-a-living-trust.html.
In general, you should maintain a healthy long-term investment in a well-diversified stock mutual fund. Long-term is typically considered to be a period of 10 years or longer. Conventional long-term investments include those designed for future home and auto purchases, house maintenance, and any other financial goals with a similar long-term horizon. I am a big fan of stock index mutual funds as a vehicle for long-term investments. These mutual funds move with the market and are hardly outperformed by other specialty funds – in the long run. Also, they have an expense ratio that's next to nothing. Almost every investment company (i.e. mutual fund company) features a stock/equity index fund. Such a mutual fund is already well-diversified – so there is no need to invest in more than one. Keep in mind, as your investment goal approaches, you should gradually shift your funds to more conservative and safer investments.
Safe investments are those used to satisfy financial goals of a few months to no more than a year or two. Due to their short-term nature, such investments are better held in safe, liquid assets. These include money market deposit accounts (offered by banks and savings institutions), money market mutual funds (offered by investment companies), and certificates of deposits (offered by banks, credit unions, and savings institutions). Note that only investments held in a banking institution is insured by the FDIC.
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