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 strong 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 strong 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. There
have been major tax changes in recent years, though some are set to expire
in 2009 and others in 2011 unless Congress makes them permanent. But in
the meantime, you can 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. |
