4 Ways to Protect Your Money
Jan 6th 2014 9:49AM
Updated Jan 8th 2014 8:50AM
The primary concern of many investors is their return on investment. It's easy to get hung up on ROI and obsess about every percentage point, but the reality is that if investors haven't protected their assets, they're sitting ducks. Missing one stoplight, falling off a roof, or even simply taking Social Security benefits early can harm an investor much more than a 20% annual return can help. As someone who writes about and analyzes personal-finance issues, I think people should be more concerned about protecting their assets.
One accident away from poverty
While the hunger for a higher return on investment seems to motivate most people to seek financial advice, few seem to understand that without adequate insurance and safeguards in place, they could lose everything they worked so hard to achieve. One catastrophic car accident without proper liability coverage could make all of one's assets vanish in a lawsuit or legal settlement.
I liken protecting one's money to the feudal era, when the rich displayed their wealth by building large castles and then protected them and their valuables with a deep trench filled with water -- a moat. Investors today need a "moat" of sorts to protect themselves and their families from unforeseen illness or long-term disability. Asset protection strategies are just as important as investment returns. While it's great to accumulate wealth, it's just as important to protect your savings, your home, and your peace of mind.
There are several things that can protect your money and your assets. I've come up with four important items that you can't do without to help protect you and your loved ones.
1. Get covered or lose your shirt
The moat protecting your castle is life insurance, disability insurance, homeowners insurance, car insurance, liability insurance, medical insurance, and long-term care insurance. All this coverage shifts the majority of the risk to someone else -- an insurance company -- and ensures your financial security isn't jeopardized by unplanned events. The details of these plans -- deductibles, liability, disability, long-term care options, and tax consequences -- can be complicated, but they must be considered.
2. Learn to wait for Social Security benefits
Don't underestimate the importance of Social Security, because it's one of the few revenue streams that can withstand market downturns and inflation, according to James Mahaney, vice president of strategic initiatives at Prudential Financial. Some strategies to make your Social Security last include waiting to tap your benefits for the most return and, for married couples, having the higher earner in the relationship delay receiving benefits to maximize the payout for his or her surviving partner. Also, because the taxes on Social Security and retirement plans can hit seniors hard, especially when they're cashing out savings from IRAs, a mixture of traditional IRAs and Roth IRAs can help alleviate the one-time tax hit.
3. Till death do you part
Besides insurance, it's important to have an estate plan to provide for your loved ones that helps minimize taxes. This could mean planning for a long-term disability or keeping family members abreast of advance medical directives. Trusts are also important because they can provide order to your financial affairs, assist with tax planning, simplify estate settlements, and give guidance to your family and heirs. There is an ongoing debate on trusts versus wills, but the main difference is that with a trust, people can avoid probate, so their assets pass instantly to heirs, rather than sitting at least six months in court. Because it avoids probate, a living trust also means the details won't end up as public record. However, trusts generally are a little more expensive to set up than standard wills.
Clients should research estate planners who can guide them through the process. Another part of estate planning is understanding when you may need a power of attorney, living will, or advance medical directives, as well as how important these will be for your family when you're gone.
4. Take the corporate tax rate?
Different kinds of business ownership can mean fewer taxes and less cost. So, if you're a business owner, will it be a sole proprietorship, partnership, corporation, or limited liability company? How you decide this question often changes your financial situation. For a business with some risk, acquired either through juggling others' finances or possibly courting personal injury, owners may want to create a corporation or limited liability company that provides personal liability protection, according to Beth Laurence from Nolo.com. However, if a business isn't risky and needs to start up with as few fees as possible, the sole proprietorship could make the most sense. Taxes are generally based on profits, so they vary little between a sole proprietorship, LLC, and partnership. Corporate taxation is different and can have a lower tax rate than most individuals pay for the first $50,000 to $75,000 of income.
These strategies, which do not guarantee success or protection against losses, should be discussed with your financial advisor. Your attorney can also assist with estate planning, and insurance agents can help you with your coverage needs. Once you have manned your castle walls and dug a large moat around your assets, only then should you ask about that 20% return on investment.
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