November 2007

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Your choice: 4 long-range planning considerations

Debt, credit, death, and retirement
4 long-range planning considerations
By Stanley B. Greenfield, RHU

Everyone needs to do some long-range planning. The longer the period you have to plan for the better.

Time has a way of healing a lot of financial mistakes. You make some mistakes; you recover; and hopefully you don’t make the same mistakes again.

The areas you need to take a good look at are “D, C, D, R” — debt, cash, death or disability, and retirement.

• Debt and its rule of thumb. Debt is, indeed, a “four letter word,” but it is also a fact of life. You will probably be dealing with some form of debt throughout your entire life, so the first thing is to better understand it, not fear it.

A good rule of thumb is “money is worth what you can borrow it for.” In other words, if it costs you 10 percent to borrow money, and you have debt that costs you 6 percent, don’t be in a hurry to pay it off. This does not mean you should hang onto debt; it means you might be better off paying that debt based on your payoff schedule.

Take a good look at your debt and see if it can be restructured or refinanced to save some interest and improve cash flow. In other words, lower your payments.

For example: Mortgages fall into the category of long-term debt. Consider what the debt costs after taxes. A 7 percent mortgage only costs a net of 4.9 percent if you are in a 30 percent tax bracket. Can you borrow money at 4.9 percent? Probably not, so refinancing to increase a mortgage debt can actually save you money.

• Cash for contingencies. Cash is something everyone needs. Set an initial cash goal of $10,000 to cover emergencies and opportunities. Later, set a goal to have enough in your cash account to cover one month of personal living expenses, as well as enough cash to cover one month of overhead for your practice. That much cash can also give you a sense of security.

Do not keep this fund in your checking account. Isolate it in an account, such as a money market or Series I Savings Bond, to allow it to go to work for you.

• Death and disability planning. In any planning, you need to plan for the potential problems your significant other and children would face if you suddenly died.

How would they deal with inherited debt, and how would they survive?

One solution is life insurance. Most people

That advice is partially correct, but also misleading. Term insurance is only cheap for a few years. If you were to purchase a term policy and keep it throughout your entire life, you would end up paying more than four times the death benefit. And as you get older, and your chances of collecting increase, the insurance company raises the rate to “price you out” of the policy.

A better solution: Research some of the newer types of permanent policies available on the market today, such as a variable universal life policy, which wraps an insurance policy around a portfolio of mutual funds.

Since the funds are within the policy, they are protected from taxes and, in most states, creditors. This package gives you protection and allows you to accumulate some equity in a sheltered environment. Those funds can be used for your children’s education or as an emergency/opportunity fund if needed, with no taxes to pay.

They can also produce a retirement income that can start at any time, and the flow of cash is tax-free.

Another type of protection you should consider is disability insurance. Look for a personal disability policy that will replace as much as 50 percent of your income, and make sure the policy will cover the overhead for your office. (This is called a business-overhead policy.)

• Retirement. There are many types of retirement plans, and no single plan is the best for everyone. You may even consider a combination of two or more plans.

The type of plan you choose depends on how many employees you have and how much you are willing to give them in contrast to how much you want to stash away for yourself.

Other factors are your age, how much time you have to accumulate funds before you retire, and do you want a tax savings now or later? Consider all of these points before making any decisions.

If you set up a plan to deal with debt, cash, death or disability, and retirement, you will be well on your way to financial security. Have a nice journey.

Stanley B. Greenfield, RHU, is a registered financial consultant and a registered professional disability and health insurance underwriter (RHU). He is president of Greenfield's Financial Power Program and offers financial and practice management to the chiropractic community. He can be reached at stan@stanleygreenfield.com or by phone at 800-585-1555.

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