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ANTICIPATING THE PREDICTABLE
Among the
eventualities you have to anticipate is the possibility of dying while others
are dependent on you for financial support. One of the ways to help protect
them is to have adequate life insurance.
At the other end of the
scale, you might leave an estate
large enough to generate a substantial estate-tax bill, which the death benefit
paid on a life insurance policy could help meet. That's why most experts agree
that life insurance plays an essential part in your long-term financial
planning.
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No matter how carefully you prepare for retirement, there's always something
you can't predict. Sometimes you're surprised by good news, such as a generous inheritance or
years of b investment performance. But it's important to be realistic in your planning. That
means taking precautionary steps to cushion yourself, and those who are dependent on you, from
the financial strains that can result from illness, unstable economic markets, and other problems.
ILLNESS
Nobody plans on being sick, but the reality is that as you grow older you are
increasingly vulnerable to illness or injury. So it pays to plan ahead.
First, you need good health insurance. But you also need a steady
source of income that you can activate when you need it, and can count on to
last your lifetime — even if you live to be 100 plus.
You can use different types of insurance to help protect your financial health.
Long-term care insurance is designed to cover medical and nursing care over an extended
period of time. Keep in mind, if you're considering this approach, that the premiums and cost
of the insurance will be greater the later you buy. If you try to purchase a long-term policy
in your 70s, for example, the premiums may be prohibitive. But if you buy earlier, and cheaper,
the benefits your plan offers may be vulnerable to
inflation since the
reimbursement amounts are often fixed. You should look for a plan that automatically boosts the
benefits as time goes by or lets you buy additional coverage to offset inflation.
Disability insurance pays you a percentage of your salary if you can't work because of
illness or injury, and
catastrophic illness insurance covers your medical costs if you
exceed the upper limit your regular health insurer will pay.
One alternative to insurance is to buy an
annuity to provide income you can use to cover the costs of long-term care or disability
should the need arise. Or you could arrange to use the annuity benefit to actually pay the premium
for a long-term care policy. Another approach is to set up a medical savings account, much as
you establish an account earmarked for education or retirement, and invest an amount equal to the
premiums you'd pay for insurance. That approach may offer greater flexibility since you can use
the money for other things if you remain healthy and independent, but there's no guarantee you'll
accumulate the assets you'll need
should you require extended care.
DROPPING INVESTMENT VALUES
Another reality you have to face is that your investments may lose value, especially in the
short term. Or interest rates may drop and reduce your anticipated income.
When equity markets produce b
earnings, it's easy to forget that prices and
dividends can move down as well as up. So while you need equity investments for long-term
growth, counting on their performance on a daily basis can be unsettling. For example, if you're
planning on an 8% annual return on your stock and
mutual fund investments, so that you can withdraw at a high enough rate to meet your
needs but not eat too far into your principal,
a period of lower returns can disrupt your plans.
The same is true of fixed-income investments.
If you have money invested in older bonds
paying at 6.5% and the best rate you can find to reinvest your principal is 4.5% when a bond matures,
your annual income on a $100,000 bond investment would drop $2,000. The lower the current rate,
the greater the loss of income could be.
CHANGING TAX RULES
Over time, tax laws are modified to reflect changes in the economy, shifts in political thinking,
and evolving attitudes toward investing. For example, the former penalty for excess withdrawals
from IRAs and other retirement plans has been dropped and the ceiling on contributions to most plans
has been raised. Additional ways to accumulate tax-free savings have been introduced.
Of course, there's no way to predict the rate at which you may have to pay taxes on your future
earnings, or whether the rules governing
tax-deferred and tax-free investing or estate taxes will be tightened or relaxed. But, you can still take advantage of the existing opportunities to build your retirement
assets and hope for a resolution that works in your favor.
What sometimes happens is that existing rules are grandfathered. That means they continue to
apply to existing plans, but not to new ones. But that hasn't been as common in the recent
changes as it once was. |
