Profit & Loss - August 2011

Summer Review

Taking a look at the complete financial picture

by Jimmy Lee, CFS and Managing Partner

The summer months are an excellent time to perform a review of current strategies for investments and financial plans.  It’s comparable to halftime during a football game.  Look at results from the first half and make the necessary adjustments to win the game.  Here are some specific areas to include during a halftime analysis. 

Asset Allocation

 Many investors forget to rebalance their portfolios on a systematic basis and end up taking on more or less risk than they want.  Rebalancing allows an individual to sell the investments that are up and buy more investments that are down.  In essence, buy low and sell high. 

What’s your number?

 Is it time to increase or adjust contributions to a retirement plan?  Everyone needs to know their number: what they need to accumulate in order to retire.  Unfortunately, many people who are planning for retirement don’t know their number.  The variables involved include how much time until the desired financial independence day, how much has currently been accumulated to date, the assumed rate of return on the assets used for this goal and the amount of income needed to satisfy income objectives.  It is not difficult to figure out the number but nuances come in when managing it on an ongoing basis.  For some people, taking the time to make the proper adjustments can mean having to work more years than they want to or not.

Risk Management

 Summer is also a good time to review insurance coverage.  Many people gain from having a review of property and casualty coverages such as automobiles, home, etc.  Make an appointment with your agent to ensure you have the proper coverage amounts.  Also, discuss the merits of having an umbrella policy to cover unexpected risks and provide protection above other policy limits. 
 Life and disability income insurance is a must for anyone who has income they want to protect from a long-term disability or premature death.  It is critical to have long-term disability income insurance to provide income when the bread-winner is unable to work because of a sickness or injury.  Most policies have an option to receive partial benefits to work part-time, but lose some income.  When it comes to life insurance, it is most important to make sure there is the right amount of coverage versus the type of insurance.  Term insurance is great for temporary coverage but whole life or universal life insurance is better for people with permanent needs. 

Estate Planning

 Most people spend a considerable amount of time accumulating money and property so they can enjoy their lives and provide for their loved ones.  Estate planning encompasses the accumulation, management, protection and distribution of property in a manner that permits the greatest possible fulfillment of these goals.  Estate planning may help ensure the transfer of property to heirs while minimizing financial and emotional cost.  Without proper estate planning, a person may die without a will, with an out-of-date will,  without proper business succession agreements or without sufficient insurance to protect loved ones and pay expenses. 
 The result of having an un-planned estate can be significant.  In some cases, the wrong beneficiaries end up inheriting the wrong property at the wrong time and precious estate liquidity may be eaten up to pay estate taxes, income taxes and expenses.  Survivors can experience greater intra-family bitterness and less financial security at an already traumatic time.  By working with an attorney and creating an estate plan that fits specific needs, much of this can be avoided.
 Few people realize that, even though they may have a modest estate, their estate may be subject to state and/or federal estate taxes because they own a life insurance policy with a substantial death benefit. This is because life insurance proceeds, while generally not subject to federal income tax, are considered part of your taxable estate and thus potentially subject to estate tax.
 A solution to this problem is to, with the help of an estate planning attorney, create a properly formed  irrevocable life insurance trust that will purchase a life insurance policy, pay the premiums (via cash gifts), and receive the policy proceeds upon death. A properly drafted life insurance trust may provide liquidity with which to pay expenses of the estate and keep the insurance proceeds from being taxed in the estate.
 Other tax planning tools include charitable trusts, dynasty trusts, etc. Visit an attorney to review the estate plan and make sure all bases are covered.