One of the most important objectives of financial planning is to identify and eliminate sources of unacceptable financial risk.
Some unacceptable risks can be avoided – the risk of dying in a skydiving accident can be avoided by avoiding skydiving – but others must be insured against. For most people, the biggest financial risk is health care risk. Both the odds of needing health care and its cost are high. Whether it’s through the Federal Employees Health Benefits Program, Medicare or private health insurance, make sure that you have health insurance at all times.
The next biggest risk in most cases is associated with property and casualty losses. This means that your valuable possessions, like your home, furnishings and car, should be insured against unaffordable loss, and that you should be insured against outside liability. I recommend that you keep your deductibles as high as you can reasonably afford to pay and that you maintain a general liability limit of at least $1 million – more if you have a net worth greater than this.
Disability often poses the next biggest threat. As a federal employee, you are potentially eligible for disability retirement under the Civil Service Retirement System or Federal Employees Retirement System. Most insurers consider this to be adequate.
Once you reach retirement age, however, you should consider enrolling in the Federal Long-Term Care Insurance Program. Start by considering a three- or five-year benefit period, 5 percent inflation protection and a daily benefit amount that approximates the average cost of care. You can reduce the daily benefit amount until the premium is affordable.
You need life insurance if your unexpected death would cause a financial need for your survivors that would go unmet by other resources. Note that all three elements are important: unexpected death, financial need and unmet by other resources. If all three don’t apply, then you probably don’t need life insurance.
If you do need life insurance, you’ll need to figure out how much to buy. The trick is to figure out how much cash will be needed at your death, in addition to what is available to your survivors to meet their needs. Figure that it takes $20 to support $1 of spendable income over a period of 20 years or more. Avoid using simple rules like a multiple of earnings since they are unreliable. Remember that the dependent survivor will have to live by your decisions. Involve them in the decision.
If you are a manager, you should consider professional liability insurance. Liability that arises from employment activity is usually not covered by personal liability insurance. You should carry at least $1 million in protection.
Are you saving enough for retirement? Make sure that your elective deferrals to the Thrift Savings Plan are maximized. You should be saving the maximum amount possible toward retirement – up to $16,500 for participants under age 50, or $22,000 for those aged 50 and over during 2011 – to your TSP account. If you will reach age 50 during 2011, contribute at the higher rate at the beginning of the year since there is no proration of the catch-up contribution limit for partial years. If you are covered by FERS, make sure to spread your contributions evenly over the entire year to maximize the matching contributions from your agency.
You should be exhausting the contribution allowance to your TSP before you save anywhere else for retirement, since it is unlikely you’ll find a better alternative.
Are your retirement savings properly invested? While competent investment management is best, the next best thing is to use the TSP’s L Funds as your guide. Choose the L Fund that corresponds to your life expectancy and apply its beginning asset allocation to your account. Rebalance your account to the allocation at least once per year and not more than four times per year, and resist the urge to deviate based on what you hear or read.
Make sure that the beneficiary designation for your TSP and insurance plans are up to date, and that your will is current. I recommend that you establish a relationship with an estate planning attorney to help you develop, implement and regularly review an estate plan. This is important, both to make sure that your assets are distributed according to your wishes after your death, and to make sure that your family or friends can manage your affairs and care for you should you become disabled.
Written by Mike Miles
For the Federal Times
Publication December 13, 2010