Filling the cracks in your financial plan

Filling the cracks in your financial plan

If you’re contributing to an employer-sponsored retirement plan
on a regular basis, be sure to congratulate yourself!
If you’re contributing to an employer-sponsored retirement plan on a regular basis, be sure to congratulate yourself!

You are already taking an important step toward addressing what may be the biggest financial challenge you will ever face. And if you are setting aside money for the college education of a child or grandchild, you deserve credit for that, too.

But take heed: There may be more you can or should be doing. In fact, a well-rounded financial plan might also need to include insurance strategies and the use of annuities to safeguard your vision of the future.

However, you should consult a financial professional before deciding whether a particular insurance strategy is an appropriate choice in light of your particular needs and financial position.

Retirement readiness: more than a plan? While most financial experts encourage workers to contribute the maximum amount allowed to their retirement plans, they also warn that such contributions may not be enough to guarantee a secure future.

For example, the Social Security Administration estimates that, on average, retirees receive less than one quarter of retirement income from private pensions (including retirement savings plans); Social Security payments account for only an additional 39 percent of income. Ultimately, you may be responsible for addressing any shortfalls.

Annuities may offer one way to bridge that gap. An annuity is an investment contract offered through an insurance company and purchased with one or more payments. Annuities offer a lifetime stream of income and depending on the terms of the contract purchased, generally offer a guaranteed return of principal if you die before withdrawals begin.

And because an annuity is a tax-deferred investment account, earnings are not taxable until money is withdrawn, which means the value of your assets have the potential to grow more rapidly than in a taxable account.

There are many kind of annuities, but these two types of annuities have become more popular: fixed deferred annuities and variable deferred annuity. Variable and fixed annuities are long-term, tax-deferred investment vehicles designed for retirement purposes, but the variable annuity contains both an investment and insurance component.

A fixed annuity pays a fixed rate of return for a stated period of time. A variable annuity offers a variable rate of potential returns, based upon the wide range of investment options through their underlying subaccounts. However variable annuities don’t guarantee a fixed return. However, guarantees are based on claims paying ability of the issuer.

Since annuities generally do not have contribution limits, they may make sense for workers who have already maximized contributions to their other tax-advantaged accounts, such as retirement plans and IRAs. It is important to note that purchasing an annuity inside a qualified plan does not provide additional tax deferral beyond what is received when investing in a qualified plan outside an annuity.

The insurance safety net. You may also want to consider purchasing insurance policies in order to protect against unexpected financial hardships that might otherwise require you to spend money earmarked for other goals.

For example, disability income insurance could enable your family to maintain its current standard of living in the event that you are unable to work for a period of time. And life insurance could provide your dependents with longer-term security after your death.

Keep in mind that term life insurance only provides coverage for a predetermined amount of time, while whole life insurance can remain in effect indefinitely, provided premiums are paid. Also, whole life insurance typically includes a cash value feature that can allow you to accumulate additional wealth over time. The cost and availability of life insurance depends on such factors as age, current health, and the type and amount of insurance purchased.

To learn more about the strategies that could plug holes in your financial plan, consider speaking with a financial professional before you decide whether a particular investment is an appropriate choice in light of your unique financial needs and risk tolerance.

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