Introduction
If you’re anything like me, social distancing is beginning to make you a little stir crazy. While we’re waiting for this coronavirus to calm down and everything to go back to normal, here are four financial items that would be helpful for you to review while you’re stuck inside.
1.)Review Your Beneficiaries
It’s a good idea to periodically review your beneficiaries on all of your accounts and estate-related documents in order to ensure that the information is up-to-date and correct. This includes the beneficiaries on all life insurance contracts, annuities, investment accounts (401(k)s, IRAs, brokerage accounts, etc.), wills, trusts, etc. I know it can be tedious, but this pandemic provides a good opportunity to comb through it all.
Beneficiaries are a particularly important item to review if you’ve recently gotten married, divorced, or had children. It is not uncommon for someone to forget to update their beneficiary information and their assets end up going to the wrong person after their death. There are quite a few examples of husbands/wives not updating their beneficiary information after getting married and their assets go to their extended family or ex-spouses instead of their current spouse. Similarly, there’s been instances where a dad/mom forgets to add additional children as their beneficiaries to various investment/insurance accounts and years later one child inherits the entire account while the other kids receive nothing.
It’s important to note that beneficiary instructions on various investment accounts and insurance contracts will many times supersede the beneficiary instructions found in a will. Therefore, you really need to check your beneficiaries on each account and make sure it’s written how you want it to be.
2.)Review Your Insurance Coverage
Another financial item that people generally put off doing is reviewing their insurance coverage. While you’re limited in where you can go, I’d suggest reviewing 3 particular types of insurance coverage.
Life Insurance
Life insurance is one of those things that is often overlooked because 1.) we don’t like thinking about our own mortality and 2.) it’s not the most exciting topic to talk about for most individuals. Nevertheless, it is important that you have adequate coverage in place for your family, should the unthinkable happen.
The exact life insurance need will differ from person to person based on your particular financial situation, but a good rule of thumb for those with families is that you need to have at least 10-15 times your income in term life insurance coverage (the more debt and/or children you have, the higher this number needs to be). If you or your spouse is a stay-at-home parent, you need at least $100,000 or $200,000 of term life insurance coverage as well.
It’s beyond the scope of this particular blog post to go into an in-depth discussion on term life insurance vs various types of permanent life insurance (i.e. Whole Life, Variable Life, Universal Life, etc.), but suffice it to say that if you’re looking to buy the most life insurance coverage for the cheapest price possible, then you want term life insurance coverage (I generally prefer 20 year term policies, but that varies from company to company). If you’re in your 20’s, 30’s, or 40’s and are fairly healthy, I think you’ll be surprised at just how much term life insurance coverage you can get for an affordable price.
Don’t get cheap on this item! If you have any loved ones that depend on you or business partners that rely on you, then it’s important that you have adequate life insurance coverage in place.
Long-term Disability Income Insurance
If you are in your 20’s, 30’s, or 40’s, your single greatest asset is, most likely, your ability to continue to earn an income in your chosen profession. Just as you might insure other large assets, such as your home or car, from loss, long-term disability income insurance (LTDI) is meant to protect your income in the event you become disabled for an extended period of time.
Now is a good time to review exactly what coverage you have in place through work and any existing individual LTDI policies that you currently have in order to make sure that you are adequately covered. You may believe that your group LTDI coverage through work is sufficient enough, but I would encourage you to do a little digging in what exactly is covered. Most group LTDI policies are capped at 60% or 65% of your income and if the policy is paid by the employer, then the benefit will be taxable to you when disabled. This means that the after-tax benefit of most group LTDI policies is usually less than 50% of your take home pay. For most people, this is not enough coverage and they need a supplemental individual LTDI policy.
For more detailed breakdown on LTDI, I would encourage you to read my blog post on the subject.
Home and Auto Insurance
In a similar fashion, if you haven’t reviewed your home and auto insurance recently, it would probably be a good time to look it all over and ensure that you have proper coverage. It would also probably beneficial to ensure that you are working with a reputable insurance provider. Lowest price doesn’t always mean the best company for you to go with. You want to make sure that, should a claim happen, your insurance provider will work quickly to process and resolve your claim.
3.)Review your investment portfolios
Asset Allocation
Now is a good time to review the asset allocation of your investment accounts. The proper allocation will vary by individual, but is driven by two main factors: risk tolerance and risk capacity.
Risk tolerance is the measure of how comfortable you are with the volatility in your investment portfolio. If the stock market drops by 20%, some people might panic and be ready to pull everything out of the market and go to 100% cash. Others, may not enjoy seeing their account values go down, but are okay with the temporary drop and not only stay invested, but also invest more money into the stock market. The two types of individuals above have two different risk tolerances, with the former group of individuals having a lower risk tolerance than the latter. It’s important to be honest with yourself about your risk tolerance when making investment decisions. It will do no one any good if you invest more aggressively than you can stomach and go to cash in the midst of a market correction.
Risk capacity, on the other hand, looks at your actual ability to take on risk in your portfolio. Someone planning to retire within the year, for instance, might be very comfortable with the ebbs and flows of the stock market, but has a much lower capacity for risk than someone with a similar risk tolerance that is in their 30’s. If there is a sudden drop in the market (like we’ve experienced over the last couple of months), the 30-something is decades away from needing his retirement money and has the capacity to ride out the market downturn and wait for markets to recover. The pre-retiree, on the other hand, is going to need his retirement money to live on just a few months and doesn’t have time to allow the markets to recover, thus he has a lower capacity for risk.
As I said earlier, the proper allocation will vary by individual and will be driven by those two main factors, but as a general rule, the further away that you are from needing that money, then the larger portion of your portfolio needs to be invested in equities (stocks). If you are twenty or thirty years away from retiring, you have a fairly high risk capacity and should generally have 60% to 90% (the lower your risk tolerance, the less you want in equities) of your portfolio being invested in the stock market in order to achieve your long-term goals. Similarly, if you are planning on retiring in 5 years, you have a fairly low risk capacity and even if you’ve invested in 100% equities for years, it’s probably time to dial that back down to at most 60% in equities.
Asset Consolidation
If you’ve changed jobs several times over the years, chances are that you’ve accumulated a few old retirement accounts from previous employers. If you’ve changed jobs quite a few times over the years and you never consolidated accounts, you might have A LOT of old retirement accounts floating out there. I’ve seen clients with over a million dollars in assets have 20+ accounts, many with a few thousand dollars in them.
Now would be a great time to consolidate some of those old accounts. There’s a couple of reasons why consolidation is a good idea. First, it just reduces the amount of accounts that you have to keep up with and makes it easier for you to manage your investments.
Secondly, some retirement account providers have annual fees that they assess on their customer accounts. If you have a lot of old accounts out there and several of them have their own fees that are being assessed annually on your accounts, then you could be paying more in fees than you need to be. By consolidating your accounts, you can reduce the amount of fees that are being assessed on your investment accounts and allow more of that money to stay in your account and continue to compound.
4.)Review Your Credit Report and Credit Score
Your credit report is a very important aspect of your financial life. If you ever want to borrow money from a bank or apply for a credit card, lenders are going to check and see what is in your credit report. Because of this, it’s really important that you periodically check to make sure that what is in your credit report is correct. While you’re still stuck at home practicing social distancing, now would probably be a good time to do this if you haven’t in a while. You can get a free credit report once a year by going to annualcreditreport.com.
Also, while you’re at it, sign up for a free account with Credit Karma. They will allow you to check your score whenever you want for free and regularly update you on if your credit score went up or down. If you want to improve your score, they will tell you areas that you can work on to increase it.
Conclusion
Being stuck in the house is a pain, but by reviewing the above items you can at least be productive during this time of quarantine. If you have any questions about the above items, feel free to email or call me. If you want to have a more in-depth discussion about your personal financial situation, schedule a free initial consultation here.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Daniel Patterson, and all rights are reserved. Read the full disclaimer here.
