Episode 6: Certified Financial Planner Jeb Jarrell answers 3 questions he hears most often from clients and those thinking about hiring a financial advisor. If that person is between 35 and 45 years old, these issues are always brought up during conversations. We’ll break them down in this episode.
Question #1: Am I Optimizing My Finances?
This question is usually aimed at making sure nothing is falling between the cracks. The person asking generally has a financial strategy, but wants to make sure he/she hasn’t neglected to consider another aspect of a comprehensive financial plan. The term “optimizing” is often used because they are really trying to dial-in the plan.
Question #2: Should I Consolidate My Retirement Accounts?
This is especially important for millennials who may have job-hopped. There’s a good chance they have multiple retirement plans from previous employers.
Question #3: How Much Cash Is Too Much Cash to Have on Hand?
Jeb often finds that people are keeping more than they need in their banking account. This may cause them to underperform or actually lose value in today’s inflationary environment.
Answer #1 Regarding Optimizing Finances
There typically 3 different areas to consider. The first is taxes. It’s a complicated area and there may be solid opportunities to minimize tax liability. This may involve your charitable giving practices, which is a topic we covered in Episode 5. The second area involves investments. The main activity revolves around proper asset allocation. If you’re portfolio isn’t adequately diversified, you may be assuming a higher level of risk than necessary for the yields you want. This leads to the third area which is minimizing your risks.
Insurance is one element of unnecessary risk. Most people underestimate the amount of coverage needed. Jeb generally recommends $500,000 in coverage. At 30 years of age, on a 30-year term, the coverage is extremely reasonable. Don’t forget to shop around for the best deal. Disability insurance is another element of unnecessary risk people often overlook. Jeb comments there is a 1 in 4 chance you may become disabled, for some period of time. This could be a result of a car accident, for instance. An umbrella policy would be another layer of protection to cover you, in the event you are involved in an accident that was your fault.
Estate planning is another area related to risk. If you’ve had a major life change, you should take time to update your estate plan. This could include new children and guardianship provisions. This also comes into play if you’ve gone through a divorce.
Answer #2 Consolidating Retirement Accounts
This is an issue of convenience, but there’s also an issue of returns. It may be easier to keep track of important balances and accounts if you consolidate your old retirement accounts. However, there’s a proper process to be followed. This is called a rollover. You want to make sure you don’t allow funds to be directly deposited into your bank account.
There’s also an element of risk to consider. By consolidating your accounts, you can have a much better understanding of the diversification, risk-allocation and the fees associated with the accounts.
Answer #3 How Much Cash is Too Much?
Generally speaking, having 6-figures in your bank account is usually too much to have in your account. Investing it in a brokerage account, tax-free bonds or in stocks could be a better way to generate returns in excess of what a bank account would yield. The funds are still easily accessible. The rule of thumb is to keep 3-6 months of expenses in the bank account. This is also a good way to ensure you’re optimizing your finances.
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