The Parts Of Long-Term Financial Planning That Everyone Should Know
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Mapping out your finances for the long haul can help you grow wealth, build a reliable safety net, and weather life's twists and turns. As financial markets become more volatile and retirement planning seems increasingly out of reach, especially for millennials, it's imperative to start as early as possible, securing your financial future.
Whether it's not having the right amount of insurance in place, neglecting to contribute to the correct retirement accounts, or not ensuring a seamless estate plan, many people have holes in their long-term financial planning. Learn about six key components you can include in your plan and how each one can strengthen your financial well-being.
A will is a legally binding document that outlines how your property should be divided and how personal matters should be managed after your death. It can also designate guardians for your minor children and include instructions for end-of-life preferences. In contrast, a trust is a legal structure in which you, as the grantor, assign a trustee to oversee and manage assets for the benefit of specific individuals or organizations, known as beneficiaries.
Both wills and trusts are critical estate planning tools that can help ensure your wishes are carried out and your loved ones are provided for.
Having a will allows you to direct assets to the right people and name an executor to settle your estate. A trust offers extra benefits: It can bypass the probate process, saving time and preserving privacy for your heirs, and it can even include provisions for managing your assets if you become incapacitated—something a will cannot do.
A taxable brokerage account is a regular investment account that you can open through a brokerage firm using money that's already been taxed. It gives you the flexibility to trade various assets, such as bonds, stocks, mutual funds, and ETFs, without the benefit of tax deferral or shelter.
Unlike retirement accounts, a taxable account does not provide upfront tax deductions or tax-deferred growth. Instead, you pay taxes each year on any interest, dividends or capital gains earned in the account.
A 401(k) plan is a company-sponsored retirement account that employees can contribute a percentage of their income toward for long-term savings. It can help automate saving, provide tax-deferred growth, and significantly boost your savings through employer matches.
'Given that just 11% of workers in private industry receive a pension, 401(k)s are a key pillar in building a secure retirement,' writes finance journalist Adam Shell. 'In fact, these tax-advantaged accounts remain the backbone of most people's retirement saving strategy.' Over decades, consistent 401(k) contributions can grow into a substantial fund to support you in retirement.
IRAs come in two main types: traditional and Roth IRAs.
Traditional IRAs allow you to make tax-deductible contributions in the year they're made, lowering your taxable income at that time. However, in retirement, the withdrawals you take are taxed as ordinary income. Roth IRAs, on the other hand, are funded with after-tax dollars and offer no immediate tax break, but qualified withdrawals in retirement are completely tax-free.
By consistently contributing the maximum you can and investing prudently, an IRA can grow into a sizable component of your retirement nest egg.
Term life insurance is the simplest, most straightforward type of life insurance.
You purchase coverage for a specified term, such as 10, 20 or 30 years. If you (the insured person) die during that term, the policy pays out a tax-free lump sum death benefit to your chosen beneficiaries.
If you outlive the term, the coverage ends, or you may have an option to renew at a higher rate. Term life insurance is fundamental for anyone who has others depending on their income or care. If you have young children, a spouse or aging parents who rely on you, life insurance ensures they are not left financially stranded.
Indexed universal life (IUL) insurance is a form of lifelong coverage that combines a guaranteed death benefit with a cash value element that can grow over time. Unlike term life policies, IUL stays in force as long as you continue to make premium payments. It also includes a savings component that accumulates value, often tied to the performance of a market index, offering the potential for wealth building or protection.
Rob Graham, CEO of Wealth Express, a platform that provides connection to IUL advisors, describes the advantage of an IUL as not just the protection of a death benefit, but also a wealth tool for during one's lifetime. As Graham observes, 'An IUL can accumulate wealth for an individual 'tax-free.' That wealth can then be accessed throughout one's lifetime for any reason, at any time, with no early withdrawal penalties (after the first year), 'tax-free' through loans that do not have to be paid back.'
In practical terms, this means that as your IUL policy's cash value grows, you can borrow against it and use that money—for college tuition, a business investment, retirement income, or any purpose—without triggering taxes because loans from life insurance are not considered taxable income.
Despite their potential benefits, IULs have often attracted criticism as a result of poorly set up policies. This underscores the importance of choosing the right financial advisor to help establish a strategy for an IUL. Graham notes, 'Many ill-informed agents max out the insurance and minimize the cash value component of the contract. This is bad for the consumer, and usually the consumer learns about it too late to do anything about it.'
To truly realize the 'personal banking' advantages of an IUL, the policy should be designed with a relatively lower death benefit and higher contributions going into cash value, within allowed limits.
While annuities are often one of the more misunderstood retirement strategies, the right product can provide a predictable income stream in retirement without exposure to volatility in the stock market.
'Recessions can be damaging to the economy and the stock market; they don't have to be damaging to your retirement lifestyle,' says Ty Young, CEO of Ty J. Young Wealth Management. 'The proper annuity, used correctly, can be the difference between a recession ruining your retirement and living the retirement lifestyle you've always dreamed of.' When you buy an annuity plan, it will pay you a guaranteed, specified sum of income upon reaching a certain date.
Long-term financial wealth and security is built through incremental steps over a long period of time. Starting with the right infrastructure, such as robust estate planning, asset protection, and tax strategy is crucial. Then it becomes a process of remaining consistent in your investing and allowing compound interest enough time to accumulate.
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