|
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.
|
|
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 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.
|
