Insurance: Managing Your Risk

Insurance is a way to manage your risk. When you buy insurance, you are seeking protection against unexpected financial losses.

Managing risk is an important component of financial planning. The experiences of Covid 19 has brought home the reality of vulnerabilities in this area, particularly budgeting and planning for emergencies. Planners suggest that 3-6 months of income in a short term savings account for emergencies and opportunities is a basis of a sound plan. Further, setting a family budget and reviewing your spending is a cornerstone of the process.

Tax time is a perfect time to review or create a budget. Credit card companies have year-end reports that can categorize all of your spending and even allow you to download to an excel spreadsheet to be able to sort transactions as needed. The same is true of most online banking arrangements.

A clear understanding of your spending divided by needs and wants will help you prepare for emergencies or opportunities in the future. It is always a surprise at how those little “impulse” transactions add up.

While the country’s saving rate is improving, more is needed. Often we save for vacation. How about saving for that longest vacation: retirement?

Many employers have opportunities for tax-favored retirement savings in a 401k or 403B plan. IRA (Individual Retirement Accounts) are also available. Outside of large employers or government employers the pension plan is a thing of the past.

The difference between the two is simply that the first three are accumulation vehicles, while a pension is a guaranteed or promised income benefit. Accumulation vehicles must later be transitioned to accounts that create income.

How much you actually need to have saved for retirement? First you will return to the budget numbers. How much do you actually need to maintain your lifestyle or the style to which you wish to become accustomed? Will you have a mortgage? What will insurance cost: home, auto, life, etc? What is your gift budget for family and charities? How about travel or hobbies? Of course we don’t know for sure the costs in the future, but we can use today’s dollars and then include an inflation factor to get close.

Once the value is determined, planners will suggest that you can withdraw about 4-6% annually from a properly balanced account and expect to never run out of money.

If you are not working with a financial planner, you can get a very good start on the process by using tools available at bank websites as well as brokerage websites. To be successful it will take some effort and rigorous honesty about how you spend money. One popular free program can be found at www.mint.intuit.com.

My favorite financial planning “nugget” is the ability to guarantee a rate of return in excess of 20%, no risk! Simply pay off credit card debt! I present a class to my son’s 8th grade students each year on credit card debt. In that presentation, I brag about the fact that the only interest I have ever paid is on a car or home loan! I want them to understand the difference between “wants” and “needs”. Further, I want them to know that credit cards are a great tool when used carefully and to your benefit. Just don’t give the vendor any interest!

I recently spoke with a couple who felt their retirement savings of about $400,000 should be adequate when they retired 6 years from now. I challenged them to locate their social security statements, mortgage statements and review their spending to check the plan. If those funds grow and they continue to fund the IRA’s, they could have $500,000 in 6 years. Spending $70,000 per year after taxes, even with Social Security of $3000 monthly, that $500,000 will likely not last them to life expectancy of 85 or more.

I am intrigued by the idea that it is “crass” to think about money. Money is simply the medium of exchange that we use to support ourselves. It may not be the key to happiness, but the lack of adequate funds can certainly be the reason for unhappiness.

I challenge our readers to make budgeting and planning your winter priority, particularly the budget! Reward yourself in the spring, knowing that you have protected yourself and your family in one of the most important ways possible.

Margaret R. Beck

Margaret Beck CLU, ChFC, CEBS started her insurance practice in Redding in 1978. She founded Affiliated Benefit Services.

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