6/20/2011 6:00 PM ET|
In your 40s? Do a financial checkup
Midlife is a good time to take stock. Your wants and needs have probably changed in the past 20 years; now's the time to make sure you have the bases covered.
The personal lives of people in their 40s typically are much more complicated than in their younger days. The complexity stems largely from being responsible for more than themselves and that they finally have some assets.
Having a more-involved personal and financial life is a good thing -- it shows you have grown as you have aged. The 40s are a great time to take stock of your situation and review your overall financial situation, including your cash flow, net worth, taxes, risk management, investments, retirement projections and estate plan.
An overall review is important to ensure you're not managing your more-complicated financial affairs as if you were a recent college graduate. Your financial planning needs to reflect your current life, not the past. Failure to update your financial plans can leave you or your family unprepared for the future.
So what planning area should be high on the radar for most 40-year-olds? From my perspective, risk management -- a fancy way of saying insurance -- is one of the most overlooked areas. For example, people who are married and have children typically want to ensure their family will be OK in the event of an untimely death. A $1.5 million life insurance policy would theoretically provide a $100,000 income stream for 20 years, assuming a 3% rate of return. So the life insurance provided by your employer (typically one year of base salary) is probably not enough coverage. (Do you know how much life insurance you need? Check MSN Money's calculator.)
Another area of concern should be long-term disability. Review your employer-provided long-term disability policy and make sure you understand the terms and levels of coverage. Run the numbers to see the projected impact of an LTD event on your family based on your current coverage. If your projections indicate you have too little coverage, see if your employer offers supplemental coverage to close the shortfall. (See MSN Money's calculator to find out how much long-term care is likely to cost.)
As your wealth increases, make sure you have adequate liability protection. The next time your auto or homeowner policy comes up for renewal, your goal should not be to drive down the cost to the lowest level possible but to make sure you have sufficient liability coverage in the event of an accident. Depending on your net worth, you should also consider adding an umbrella policy. Umbrella policies are usually not very expensive and provide additional liability coverage. The key for your various property and casualty insurance policies is to provide sufficient cost-effective liability coverage, not just low-cost coverage, which could leave you in the lurch if you had an accident.
Another critical area is estate planning. Regardless of your level of wealth, you need three basic documents: a will, power of attorney and living will/medical directive. For couples with children, the will is the document in which you name the guardian of your minor children in the event of your death. Don't have a will? You just left that decision to the court system.
Hopefully, you will not need these documents in your 40s, but it's better to be prepared.
The other planning areas I mentioned are also very important. A review of cash flow, taxes and investments can lead to changes that make a tremendous difference over your lifetime.
You're likely to be thinking one of two things: I don't have time to review my overall situation or I don't have the knowledge. If you're thinking either, I recommend you consider hiring a fee-only financial adviser to help you with an overall financial review. A good place to start your search for an adviser is the National Association of Personal Financial Advisors website, where you can do a ZIP code search for a fee-only planner in your area.
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