When was your last financial checkup?

August 8, 2014

You hear it from your doctor and your dentist, “You need to have routine checkups!” You usually don’t, but you should hear from your lawyer to review your estate planning documents – wills, durable powers of attorney, and living wills. Every three years is a good benchmark because of changes in the law and in your personal situation. Your general insurance agent mails you renewals on your homeowners, automobile and other insurance coverage’s, but rarely provides a “check up.” But that’s okay because you should be doing all of the above yourself or, better yet, find somebody who will do it for you and get it done.

Everyone should have a comprehensive written financial plan (CWFP). You can either do it yourself or hire someone to do it for you. The CWFP should be reviewed annually because things change. Do you have financial goals? If you do, are they in writing, and do they include deadlines?

Here’s another question. Is your debt under control? How would you know that? A CWFP will include a section on cash flow. Cash flow can be explained simply. How much do you earn? How much do you spend? The difference between the two is cash flow. If it is positive, how are you investing it? If it is negative, what adjustments can you make in your expenditures?

What about tax planning? This begins with an income tax projection. How can you save on taxes? The easiest way is to have part of your salary set aside and invest it in a qualified retirement plan e.g., an IRA, your company’s 401(k), etc. This is the least painless way to save for retirement. You never see the money because it comes out of your salary via payroll deduction. This reduces your taxable income and your taxes. The money in the plan grows tax-deferred which means that you don’t pay any taxes until you withdraw the money. If you’re like most people, your taxes will be lower in retirement because you will not have a salary.

The problem is you probably wouldn’t know this unless you have a financial plan. OK, you’re convinced that salary deferral is the way to go. But how do you invest your money in your qualified and non-qualified plan(s). A CWFP addresses investments. It will match the risk of your investment portfolio with the return necessary to achieve your goals.

Some of your goals may be competing. A CWFP will give an idea of how much money you will need to retire, and how much you will need for college education(s). You may not have enough for both; therefore, you might have to alter your course. Obviously, this is a problem that needs to be resolved; however, if you are unaware of it, the ticking you hear may be a time bomb.

As mentioned above, your insurance agent may not provide a full review with your annual premium notice. If you have a CWFP and you review it annually, the problem is solved.

Risk management is addressed in a CWFP. What are the risks of life? They are as follows: you can become ill, disabled, you can die, your property can get damaged, somebody can sue you, and you may wind up in a nursing home. These risks of life are generally insured, but you want to make sure that your coverage is adequate and up to date.

The last area to be addressed in a CWFP is estate planning. Most people think of estate planning as dealing with the confiscatory estate tax rates that go up to 40 percent; however, they only apply to a small percentage of the population. Everyone needs the three basic documents of estate planning. They are a will, durable power of attorney, and living will.

Everyone has a will. If you die without one, you are intestate, meaning the state in which you reside has one ready for you. You probably won’t like this will, so you should have your own drawn up. A will tells your executor how to settle your debts and distribute your worldly goods. However, before you die, you may need the other two documents.

A durable power of attorney appoints someone to handle your affairs if you become incapacitated through accident or injury. If you don’t have this document someone, who you might not select, could be named your guardian through the legal system and would take control of your affairs.

The last document is a living will. It tells caregivers e.g., doctors what your desires are for resuscitators, feeding tubes, etc. Your wishes may not be honored by the institution in which you find yourself, therefore, it’s a good idea to have them spelled out in a living will.

So, now you see the importance of having a comprehensive written financial plan and having it reviewed annually.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann, CFP® is a registered representative with and securities and insurance offered through LPL Financial. Member FINRA/SIPC. He can be reached at 600 East Crescent Avenue, Suite 104, Upper Saddle River, NJ 07458, 201-291-9000.