Six life events that affect your financial plan – and how to prepare for them
If there’s one thing we can all be certain of in life, it’s having to adapt to change. As Grammy-winning singer and entrepreneur Jimmy Dean once put it, “I can't change the direction of the wind, but I can adjust my sails to always reach my destination.”
While you may need to quickly adjust your financial “sails” occasionally to respond to unexpected life changes, there are many other events that you can prepare for in advance to make future course corrections much easier. Here’s a review of six major life events that can alter your financial plans – plus some actions you can take now to make sure you’re prepared for the future.
1. Buying a home, vacation home, or income property
Most Americans (64%) own their own homes; 11% own investment real estate that they will rent or re-sell. If you’re one of them, your house and other real estate holdings may play a key role in your saving and investing strategy – and your estate plan.
How to prepare
Most likely you will purchase homeowner’s insurance to cover unexpected damage, theft, and personal liability; and you may have flood insurance to protect your property too. But don’t neglect the importance of correctly titling the property you buy as well. Depending on your personal and business situation, you can hold your real estate properties individually, jointly, or in a vehicle like a trust or Limited Liability Company to provide asset protection and facilitate estate/transfer tax planning.
2. Getting married or remarried
A new marriage is the perfect time to combine and update your financial plans and prepare in advance for change. If you have substantial assets (or a prior “learning experience” via divorce), creating a pre-nuptial agreement BEFORE you marry may also be a good idea.
How to prepare
Don’t forget to review your life, health, and disability insurance and make any necessary changes in coverage and beneficiaries as soon as you are married. If you both work, decide which employer’s health insurance is the better deal and drop the other.
Other actions you should take to be ready for future changes:
- Re-title accounts, assets, and real property to be held individually or jointly with your new spouse.
- Revise your estate plans, including your wills, trusts, powers of attorney, and health care proxies.
- Update your saving and investment strategies based on your views as a couple on your new goals and risk tolerance.
3. Starting a new business
If starting a new business is one of your goals, you’ll want to make sure your financial plan and investing strategies are on track to create the money you need to achieve that goal.
How to prepare
When you’re ready to put your new business in place, you and your attorney will decide on the right business structure: Sole proprietorship, General Partnership, Limited Liability Company, or Limited Partnership. You’ll also want to keep your personal and business accounts separate and consider creating trusts to protect your personal assets from exposure to the businesses’ risks.
As with other life events, make sure all of your assets are properly titled; your beneficiaries are up to date; you have adequate life, health, disability, casualty, and liability insurance to protect your family and the business; and you revise your estate plans and documents as necessary.
You’ll also need to develop an exit strategy, which could involve buy/sell agreements funded with life insurance. If it’s a family business, you’ll need a plan for ownership/management by the next generation, perhaps funded through trusts and gifting strategies.
4. Receiving a settlement, inheritance, windfall, large bonus, or business sale proceeds
Whether from a rare event like winning the lottery or a more common occurrence such as receiving an inheritance, you may need to accommodate the arrival of a single large sum at some point in your life.
How to prepare
Before you do anything else, your first step should be to consult with your advisor and a knowledgeable tax attorney to understand the income and tax implications of your windfall.
Your advisor can then help you explore how the extra money might be used to:
- Reduce debt and/or save more for the future.
- Set aside more for your beneficiaries via gifts to trusts.
- Refine your investment strategy.
- Update your estate plan to account for this new addition of wealth.
- Splurge on a “luxury” item such as art, jewelry, a boat, or a family travel experience.
5. Managing a personal health crisis
Becoming seriously ill, injured, or disabled is not as uncommon as you might think. In fact, 56 million Americans today, or 1 in 5, live with a disability; and 38 million (1 in 10) are severely disabled. This is why you want to plan in advance for the effect that a debilitating health issue could have on your financial plan.
How to prepare
Obviously, maintaining adequate health insurance coverage at all times is paramount. And purchasing disability income insurance is critical too, especially if you’re self-employed. It may make sense to consider long-term care insurance or a hybrid product incorporating the features of both life insurance and long-term care coverage.
Don’t forget the importance of having joint accounts, powers of attorney, a health care proxy, and advance directives in place so people you rely on can manage your financial affairs and health care decisions if you can no longer do so. Trusts are also an excellent way to provide continuity in the management and distribution of cash to your spouse and family when you are incapacitated.
6. Beginning retirement
Leaving the workplace to retire and pursue your “second act” may be one of life’s most welcome and anticipated events. But it can also bring unexpected challenges because your retirement could last 30 years or more – and it’s hard to predict what the cost of your health care (or anything else) might be in your later years.
How to prepare
Chances are, having ample income to last throughout your retirement is already one of your top financial priorities and you’re already maximizing contributions to tax-deferred investing accounts. As you get closer to retirement, your advisor may recommend shifting from stocks to less volatile investments to keep your asset allocation in sync with your changing needs and risk tolerance. Your advisor also can help you prepare for the possibility of higher health care costs in retirement by self-funding those needs and/or purchasing insurance.
You may also want to begin thinking in advance about purchasing a home or condo where you want to live after you retire – near your children, in a warmer climate, or in a full-service country club community.
How Boston Private Can Help
Your Boston Private advisor can work with you to explore these and other life events, develop “what if” scenarios for your individual situation, and recommend ways to plan for them. He or she has the experience and skill to help you evaluate the steps you need to take now to effectively navigate life’s expected and unexpected changes in the future.
The opinions expressed and information contained in this article are given in good faith, may be subject to change without notice, and are as of the date issued. The accuracy and completeness of this information is not guaranteed. Since each client’s situation is unique, please review your specific investment objectives, risk tolerance and liquidity needs with your advisor before a suitable investment strategy can be selected.
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The opinions expressed and information contained in any article published in the Vault are given in good faith and considered reliable. However, such opinions and information are subject to change without notice and are provided only as of the date issued. Neither Boston Private nor its affiliates warrant the completeness or accuracy of such information. Any third-party opinion is solely the opinion of its author and does not necessarily reflect the opinion of Boston Private or its affiliates. The materials on this website are for informational purposes only and do not take into account your particular investment objective, financial situation or need. Since each client’s situation is unique, you should consult your financial advisor and/or tax planning professional before acting on any information provided herein.