Key Components of a Comprehensive Financial Plan
When you think about the concept of financial planning, what comes to mind? Saving money? Buying stocks? Maxing out your 401(k)?
Saving and investing are essential parts of financial planning; they’re what you need to fund your goals for the future. And as you make progress toward reaching those goals, it’s fun to watch your wealth accumulate and think about how you’ll be able to spend your time (and money).
What often gets lost in the shuffle of financial planning, however, is the need to protect what you’re working so hard to achieve.
For example, your financial plan probably assumes you’ll continue to make contributions throughout your working life. So if that income stream gets interrupted—if you lose your job or become unable to work because of injury or illness—saving for things like retirement will grind to a halt. And unless you have in place tools to protect your income, like an emergency fund, life and/or disability income insurance, long-term goals like saving for retirement will be thrown off track.
These days, it’s more important than ever to protect your ability to earn an income because your financial future is largely in your hands. With pensions dwindling and the strain on the Social Security system, the retirement landscape has shifted. It’s now up to you to generate the income you’re going to need to fund your retirement, which can put even more pressure on your ability to save for other goals, like college for the kids.
That’s why planning for the unexpected is one of the most important components of a good financial plan. Of course, we all want to feel invincible, especially when we’re young. “Nothing’s going to happen to me, right?” That’s why protecting your ability to earn an income might not necessarily be top of mind. But each of us has a responsibility to our families to make sure our financial plans hold together in good times and in bad.
How much of a difference can it make when you take steps to both grow and protect your assets? Consider the following scenario:
For years, you consistently put away money for your retirement. Your plan was right on track until you—the family’s primary breadwinner—got into a car accident. You were out of work for two years. During that time, every available dollar was used to cover household expenses, which meant you missed making two years of retirement contributions. In addition, to make ends meet, you dipped into your retirement savings. The result? What had been a solid plan is now significantly underfunded. If you had long-term disability income insurance, the impact would have been much less severe.
If you had died in the car accident, a financial plan that included life insurance would protect the financial future of your loved ones. The proceeds from a life insurance policy can help to ensure they have the financial security necessary to live out their dreams.
In addition to providing a death benefit, some types of life insurance (whole or permanent) also accumulate cash value that can become a source of funding you can use while you’re alive to help meet other financial goals, including supplementing retirement income.1
Unfortunately, many people don’t have a comprehensive financial plan that includes elements of both protection and growth. The key is to make sure both are included and are coordinated to work well together. Not only will you be taking an important step toward creating a more secure financial future, you’ll free yourself to enjoy today knowing you’ve adequately planned for tomorrow.
1Before utilizing your policy in this way it is important to understand the impact on your policy’s death benefit, surrender value, and taxation