Securing your path to financial security

WHEN we talk about financial security, many of us think about how to earn more, save more, and invest more in order to be more financially secure for the future.

While this is an advised and proactive strategy for working towards financial security, we should not overlook the importance of devoting time, money and effort to protecting our hard-earned assets by case of tragedy.

One of the most effective ways to do this is to transfer much of your risk to an insurance company.

While it might seem like the obvious thing to do, you’d be surprised how many people have either neglected their insurance review or completely failed to purchase insurance for themselves and their family members.

For those of you reading now, have you purchased life insurance for yourself? If yes, do you know how much you are covered? In the event of your death, do you know how much your family will receive in payment and how long it will last them?

These questions should be an integral part of your financial planning journey, especially in this time of major health crisis.

However, it is also the undesirable and highly avoidant part of financial planning that many are reluctant to talk about. No one wants to talk about the death of their spouse.

Also, planning for your financial situation after the death of your spouse may seem like an insensitive topic to discuss.

This is where the services of an independent financial adviser come into play. In addition to being well versed in the various strategies and products available to develop your finances, an independent financial adviser is also able to examine your assets holistically to establish a financial roadmap based on your current financial trajectory and closing the gaps in reaching your financial goals.

Take the example of one of my clients, Joel. Joel came to see me one day after attending a seminar where I talked about financial planning because the topic piqued his curiosity about where he is now on his journey to financial freedom.

Financial goals

After our first meeting, I learned more details about the current state of his finances and his goals.

It turns out that he and his wife are in their thirties and he is the sole earner in his family, as his wife recently quit her job to focus on raising their children aged eight and five.

Although young, Joel earns RM240,000 a year and has half a million ringgits in reserve.

Additionally, Joel and his wife have also accumulated half a million in the Employees Provident Fund (EPF), while the annual expenses for the whole family are around RM96,000.

Asked about their financial goals, Joel and his wife aim to retire at age 60 with around RM60,000 in annual expenses, which they hope to last for the next 20 years until Joel turns 80. . They also hope to be able to provide RM200,000 for the higher education of each of their sons.

Joel’s wealth will drop twice in his 40s due to the cost of funding his children’s education. His wealth will peak at his 57th year when his wife withdraws her EPF. But from then on, their wealth dwindled and eventually ran out when Joel reached the age of 71.

Suffice to say that Joel was shocked by this new discovery.

After further discussion, I convinced them to consider increasing the return on investment (ROI) of their current investments, achieving an annualized return of 3.75%, on various assets and funds offering an average return on investment. 8% per year.

With just a small tweak to the return on investment they get, Joel’s wealth can now last up to 86 years. This is a marked improvement over the original projection.

Protect heritage

But here’s the rub – Joel hasn’t taken out any insurance to protect himself or his family. It turns out that Joel has a strong aversion to insurance.

His position up to the time we met was deeply personal: when he was a child, his family had a huge amount of savings defrauded by someone posing as an insurance agent. Since that day, he had always refused anyone and avoided any discussions about buying insurance plans.

However, an integral part of building a financial roadmap is also to stress test for different possible scenarios in the future, such as loss of income, disability or death.

The following scenario has been plotted to see what their roadmap would look like if Joel, the family’s sole earner, were to face an unexpected death.

Therefore, as bleak as it sounds, if Joel were to die unexpectedly tomorrow, his wealth will only last until his wife turns 43. Her children would not have completed college by then and would likely have to drop out in order to survive.

wake up call

It was indeed a very bleak picture for Joel to paint. But in his case, and his stubborn opinion of staying adamantly aloof from all things insurance, that may have been the wake-up call needed to spur him into action.

After seeing the possible reality of their children’s future crushed in the event of death, Joel and his wife made the necessary discussions and agreed that their finances should at least last until their youngest son turns 22. , when Joel’s wife would have been 51.

To make his estate last in the event of an untimely death, Joel will need to take out additional insurance of RM700,000.

I suggested to Joel that he take out term insurance with a cheaper premium. Additionally, the family will also have to adjust their living expenses after Joel’s death to RM48,000 per year.

By insuring, Joel’s wealth (in the event of his death) would now last until his wife was 52, well after their sons had graduated.

Although this is not the life they are aiming for, it is necessary to project these costs to help Joel and his wife visualize what they will face under the circumstances. This can help a couple rethink their priorities and integrate them into their existing financial goals.

Following Joel’s agreement to purchase insurance to mitigate the financial gap, I set to work redrawing the financial roadmap.

After adding the cost of insurance premiums, Joel and his wife’s planned retirement lifestyle would now last until age 84, instead of 86. Although their retirement lifestyle was cut two years short, they both agreed it was worth it.

They have peace of mind knowing that their sons would be taken care of if Joel died.

You can strive to save, invest, and earn more in your efforts to achieve financial freedom and achieve your financial goals. But do you know how all the forces of your heritage and wealth will actually come together to serve you over time?

This is where a financial roadmap, a snapshot of all your finances, comes in. In Joel’s case, it helped him visualize the real outcome of his investment and realize that despite his high income and his decent savings, his wealth was really not enough to allow him and his wife to retire.

Action needed

This prompted him to do two things for his financial security: increase his overall investment portfolio to achieve an 8% return on investment and invest in life insurance that will help his family meet important milestones in the event of his death. premature.

Using different roadmap assumptions, we were able to determine the exact amount of insurance coverage needed to meet their wishes.

Joel’s wife, previously worried about their family’s financial security and unable to convince her husband to look beyond his hatred of insurance agents, can now breathe a sigh of relief knowing that her family’s finances will be taken care of in case her husband, the sole breadwinner, is no longer there.

Joel and his wife can now focus on growing and raising their family.

Yap Ming Hui is a Certified Financial Planner. The opinions expressed here are those of the author.

Sarah J. Greer