ByÂ Isidore Ogoussan
For Tom Davis, a 25-year-old accountant living in a large Midwestern city with his wife Melanie, an administrative assistant at a law firm, life was good. A happy marriage. Two beautiful children. A stable job with the promise of advancement at the company.
Then Davis began to take stock of his life and, more importantly, began the process of planning for the financial realities ahead in a complex world. He thought of his parents and his grandparents and the â€śgood old daysâ€ť in which they lived â€” lifelong employment, no reliance on Wall Street volatility and the virtue of a solid account at Main Street Bank.
But he also wondered just how good those days really were. He recalled stories of the post-Great Depression years when the safest place for money seemed to be under the mattress. Family friends who lost pensions when their companies went under. Inflexible life insurance that never seemed to be valuable enough.
Maybe those days werenâ€™t as good as his initial thinking led him to believe. So Davis began to learn about financial planning in the new good old days â€” in other words, today, where an array of financial products and services are available to help achieve his goals.
First, Davis thought about three key stages of financial planning:
He also was smart enough to realize that these stages do not begin and end abruptly, and may differ from what others would experience, but ultimately were sound guideposts to follow.
Accumulation refers to those years when a person earns the money he or she will need in the future. Think about what happens during these years:
Of course, no one should risk the financial future without including a foundation that protects those accumulation years. Often that means basic term life insurance â€” life insurance protection for a specific period of time such as 10, 15 or 20 years.
Accumulating the resources to deal with these eventualities leads to the second stage of financial planning: preservation.
Preservation (sometimes labeled â€śprotectionâ€ť) is when one starts to plan for preserving the wealth accumulated, while at the same time paying off the mortgage, sending the kids to college and starting to build for retirement. A solid financial future often rests on the ability to protect assets. Davis will need to tap into ways to accomplish these goals, with the help of:
Permanent life insurance allows for the potential to build tax deferred cash values that may be accessed via policy loans to meet additional financial needs down the road. Some term policies, including Davisâ€™, allow for conversion to permanent policies. The couple will take this opportunity to add to their accumulation potential while continuing to build and protect their financial foundation.
Some of these choices, such as life insurance and various tax-deferred retirement plans (often with employer-matching funds) were somewhat familiar to Davis. Others were new:
Accumulating and protecting assets and building personal financial security may be accomplished with the help of a number of these tools. But after a lifetime of planning for what may come, Davis will also look forward to what some call the â€śgolden years,â€ť otherwise known as the â€śdistributionâ€ť stage.
Distribution will occur when the Tom and Melanie Davis move into retirement, when their income will largely consist of the distributions they take from investment vehicles in which theyâ€™ve saved.
Prior to entering the distribution phase, the couple will need to ensure they have tightened up their financial plans. This means inquiring with an attorney about any estate planning implications they may be facing, working with an attorney to create a will and, with the help of a financial adviser, getting the most mileage out of assets such as life insurance policies.
By taking these steps, Tom and Melanie Davis may be able to increase the value of what they leave their children and ensure there are adequate funds available to pay taxes (including state and federal estate taxes if applicable), plan for final expenses and deal with any unforeseen circumstances.
Finally, the couple can have the financial freedom to live the retirement lifestyle they worked so hard to achieve. Those trips to see the grandchildren, walks on the beach at sunset â€” whatever they choose to do â€” come with a price tag. Happily, itâ€™s one they will be able to afford.
So as Davis took stock of his familyâ€™s future, he began to layout a financial road map to take his family where it needed to go. With careful planning, help from financial professionals and an eye toward the future, he knew he could get there.
Davis will know what itâ€™s like to experience the new good old days. And by tackling the stages of life with some careful planning in place, you can, too.
Isidore Ogoussan, ChFC, is a financial adviser with 1847 Private Client Group in Conshohocken.