Eight Step Wealth-Management Plan to Enhance Financial Security

During uncertain times, you may be concerned about the effects world events will have on your financial affairs. Of course, there are no absolute guarantees of protection, but shoring up your defenses and laying the groundwork for a comprehensive wealth-management plan can help. Here are eight steps you can take now to help strengthen your financial position for the future.

1. Define Your Priorities

Before you do anything else, decide which goals are most important to you and focus on how to achieve them. For example, you might be worried about how you’ll afford a new home, your desired retirement lifestyle or the ever-escalating cost of higher education for your kids. Determine what your top priority is and concentrate your initial efforts on it.

This may require you to make some sacrifices in the short term. For instance, you might need to skip a vacation or downscale the cost of the next vehicle you buy. But it doesn’t mean you should ignore the lower priorities on your list or that you have to deny yourself all the finer things in life.

2. Adjust Your Investment Mix

Do you have the best combination of investments in your portfolio to achieve your goals and help sustain you through good times and bad? Set aside time to review your holdings and assess whether you’re on track to meet your goals, taking into account your timelines and personal risk tolerance, among other things.

To help achieve your goals, your investment portfolio generally should incorporate the following principles:

Asset allocation. You must determine what percentage of your portfolio should be allocated to each of the major investment classes — stocks, bonds and cash — based on your goals and risk tolerance. Because each category features varying potential returns and risks, it’s expected that that they’ll perform differently over time.

Portfolios more heavily weighted in stocks may be appropriate for investors who are younger or have a higher risk tolerance, while portfolios weighted more strongly in bonds and cash may be better for investors who are older or have lower risk tolerances. The appropriate asset allocation for your goals likely will also change over time, so it’s important to revisit your asset allocation periodically. Also, if one asset class significantly outperforms another, you may need to rebalance your portfolio to maintain your desired allocation among the classes. Depending on your situation, there may be alternative asset classes that you also should consider.

Diversification. This is the practice of spreading out investment dollars among different investments to reduce your overall risk. Allocation to the various asset classes is one part of this, but diversification involves putting your money in a variety of investments within each class as well.

For example, if you’re allocating 50% of your investments to the stock asset class, it generally would be unwise to invest in only one stock. If that stock price were to drop significantly, it would have a huge impact on your portfolio. But if you invest in multiple stocks (or stock mutual funds), a price drop in one stock won’t have a major impact.

Also, there are several types of stocks (and mutual funds) with varying levels of volatility that may perform differently in the same economic environment, such as growth vs. value vs. income, small cap vs. mid cap vs. large cap, and domestic vs. international. Including a mix of these types can help protect your portfolio’s value.

Your investment mix isn’t etched in stone. Continually monitor your portfolio’s performance and adjust it as needed.

3. Lower Your Debt

If you owe a significant amount of money to creditors and lenders, it can cast dark clouds over your financial horizon. Cut current debt down to a manageable size or — even better — eliminate it completely. This is especially true for credit card debt that can impose higher rates than traditional bank loans. Such debt can drain your resources.

Begin with a systematic plan that steadily chips away at the amount you owe. If possible, you might be able to consolidate several debts into one that charges a reasonable rate of interest.

Important: Interest on certain types of debts — such as student loans and home mortgages — may be tax deductible. But interest on purely personal debt, including most credit card debt, is nondeductible. So, you generally should pay off personal debts first, then worry about the rest.

4. Save More for Retirement

The sooner you start setting aside as much money as you can for your retirement years, the better. Not only will your total lifetime contributions be higher, but you can benefit from tax-deferred — or even tax-free — compounding of growth on the savings. A common rule of thumb is to save 10% to 15% of annual income for retirement, though the right percentage for you will depend on your specific circumstances.

It’s important to take as much advantage as you can of tax-favored accounts, such as employer-provided qualified retirement plans and IRAs. For instance, if you participate in a 401(k) plan, you can elect to make pretax contributions up to $23,000 for 2024 ($30,500 if you’re age 50 or over). Any growth in the account is tax-deferred; you pay no tax until you take distributions in retirement. Plus, you may receive matching contributions from your employer up to a stated amount of compensation.

Similarly, you may contribute up $7,000 to an IRA for 2024 ($8,000 if you’re 50 or older). A traditional IRA may be wholly or partially tax-deductible. Contributions to a Roth IRA are never deductible, but a Roth IRA offers the promise of future tax-free payouts. (Roth options may be available for your 401(k) or another employer-sponsored plan as well.)

Keep in mind that additional rules and limits apply to all of these tax-advantaged accounts.

5. Review Your Insurance Protection

Health care coverage is a prime concern for many people. If you’re not yet eligible for Medicare, you should ensure that you’re adequately covered through an employer-provided health insurance plan or obtain private coverage. Even in retirement, it’s advisable to obtain health insurance coverage to supplement what Medicare doesn’t cover.

In addition, you should have sufficient insurance coverage to protect your family in the event you become disabled or unexpectedly die. This includes disability and life insurance policies that meet your personal needs. If it’s available, you may want to consider long-term care insurance to guard against major erosion of funds through extended nursing home or other facility stays.

Of course, you also need adequate insurance coverage for your physical assets, such as homeowners or renters insurance and auto insurance. Depending on your particular situation, you might need other types of coverage as well, such as pet insurance, umbrella insurance, or directors and officers insurance.

6. Be Vigilant Against Scams

Americans lost $23 billion to fraud schemes in 2023, according to the Federal Reserve Bank. Scams come in various forms. They may involve phishing schemes designed to pry away your personal information or imposters pretending to represent the IRS or law enforcement. Their goal is to steal money from your financial accounts.

The old and the young are particularly vulnerable to attacks. It’s important to inform your kids and elderly family members about the latest schemes that target them and help them implement safeguards to protect their identifies, accounts and assets.

7. Set Up a Rainy-Day Fund

Unexpected events can be traumatic and costly. What would happen if you suddenly lost your job? Or if you needed a major emergency repair to your vehicle or home that wasn’t going to be covered by insurance — do you have enough cash in the bank to pay for it? You should have a “rainy day” fund for these types of situations.

How much should you save? Enough to carry you and your family through for at least three to six months. The basic idea is to give yourself enough of a cushion to ride things out without assuming exorbitant debt.

8. Meet with Your Financial Advisor

Managing your personal finances sometimes feels like a juggling act; there are so many moving pieces. Fortunately, you don’t have to go it alone. You can trust your professional advisors to help you make smart, proactive choices today to secure your financial well-being over the long run.

Copyright 2024

This article appeared in Walz Group’s September 3, 2024 issue of The Bottom Line e-newsletter, produced by TopLine Content Marketing. This content is for informational purposes only.