August 28, 2012
Younger people don’t know where to begin to save for retirement… and older generations wish they had started to work with a financial advisor earlier to maximize retirement savings, says a survey by Bank of America titled Merrill Lynch Affluent Insights Quarterly.
When I read this, I got to thinking that perhaps our own clients could not only relate, but would want to help the future generations of their family find a starting place. So, here’s a starting place you may want to share with your loved ones. It is called the Success Pyramid and is depicted below:
What does it mean exactly? Think about the geometrical structure of a pyramid. Then imagine a crack opening at the base of this pyramid. Where would that crack go? Physics tells us it would begin to make an upward climb through the pyramid, possibly destroying the whole structure. Now compare this to a family’s financial structure. For instance, what would happen to your retirement savings if you lost your job and didn’t have sufficient cash reserves? Or what would happen to your cash reserves if you had to have an emergency appendectomy – without health insurance?
To further explain, let’s start with the foundation, Cash Flow Plan/ Budget. If you were dropped in the middle of a dessert at night with just a map, would you be able to find your way home? Probably not; since you don’t know where you are in order to find your direction. Often times we try to plan our life, whether it is retirement, education for our children, debt, etc., without knowing where we are. Having a cash flow plan or a budget of what is spent and where it is spent every month provides just this; a map of where we are.
After you know where you are you have to manage your risks. It would be a sad state of affairs if you had been trying to pay down your mortgage on your home with extra cash flow, but became disabled and lost your home because you did not have disability insurance. Or you set aside an education fund for your children, but they couldn’t use it because you died without any life insurance to fund your family’s needs while they were still at home and had to use their college fund. Risk management includes, but is not limited to the following insurances or other tools to meet the needs these insurances cover:
- Auto
- Home
- Liability
- Business
- Life
- Disability
- Health
- Long-term Care
On the same track, it’s critical to have the necessary legal documents in place to protect your assets in the event of death or incapacitation. Did you know that when a child reaches the age of 18 a parent can no longer make medical decisions for that child without a Medical Power of Attorney? Or financial decisions without a Durable Power of Attorney? And for your children that have children, who would be their legal guardian if they were to pass?
Next on the pyramid are Cash Reserves. It’s recommended to have 3-6 months of income on hand at all times. Once you have this in place, you might consider a “Savings to Spend” account. Think about future repairs for your home or even a down payment to buy a new house. Consider how you will fund your vacation or music camp for your children.
Now that you have established a solid financial foundation, it’s time to start taking care of the old person you will be some day. If you remember the conclusion we started with, the question for most young people is, Where do I begin? Start by asking your employer if the company has a retirement plan. Most employer sponsored retirement plans have a matching incentive. This means they will match every dollar you put into the plan up to a certain percentage. If no plan exists, speak with your financial advisor about IRAs and Roth IRAs. Need to know how much to put back? This is a bit more complicated – different for every family and cannot be assumed by simply using a retirement calculator. I strongly recommend you get help from your financial professional.
And last, but not least, go play with that Vegas Money!
For more information about these topics covering budgeting, risk management, legal documents and savings visit our on-line learning center.