As both a financial consultant and property & casualty insurance agent, (a rare breed these days) I often meet with clients and referrals to evaluate their current policies. This is also a good time to check the status of their overall “financial home.” I have found the house diagram below to be very helpful (in a simplistic way) in getting individuals and couples to open up and discuss otherwise complex and personal aspects of their finances. This applies to young couples just starting the planning process, seasoned executives and business owners, physicians, those approaching retirement, and those who have already reached retirement age.
If this were your house, we would begin with the foundation levels: ASSET PROTECTION and INCOME PROTECTION. This is good way for us to start a dialog that will help to determine if your foundation is strong enough to support the other rooms. This includes something as simple as making sure your liability protection is adequate on your home, auto, umbrella, or business policies.
A major illness, accident or lawsuit could drain funds from other areas in the foundation as well as the rooms above. You may understand the importance of insuring these tangibles, but there is often uncertainty about and misunderstanding of the importance of adequately insuring for the loss of your most important asset (your income), while at the same time preparing for retirement.
Next we move up to discussions in the SHORT-TERM and LONG-TERM SAVINGS “rooms.” This will indicate to me if you have done any significant planning for current emergencies as well as the future, especially for retirement.
As far as the top level of the diagram (STOCKS, BONDS, and MUTUAL FUNDS), I normally would not recommend heavy participation in these areas until I am convinced that your foundation and rooms are structurally sound.
At this meeting, our conversation is very informal and open: no products, solutions, or illustrations. If “repairs” appear to be needed, at the next meeting I will offer recommendations that will firm up your foundation and lay the groundwork for your future.
Depending on your areas of need, this may include Term Insurance if you are a young couple with your first child, Indexed Universal Life if you are an executive maxing out on your 401k and looking for additional tax deferred growth with no risk, Split Annuities (immediate and deferred) if you are a teacher about to retire, Disability Income, Long Term Care, or if you are just looking for a better return on one of your underperforming CDs.
Once the leaks are repaired and the additional components of your rooms are in place, I then complete another house diagram reflecting your improvements. This one stays in your file until our next review, at which time we take another snapshot.
So, in what condition is your financial home?