Kenneth Petersen: Financial Planning Mistakes

Q: You once wrote a column listing various financial planning mistakes. I cut it out but have since misplaced it. Could you please repeat it?

A: Sure, and I will update it as well. Although the basic mistakes don't change, some have become more prevalent and have moved up the list. So here you go.

You are a financial planning failure if you:

· Don't have a personal investment policy and investment plan. This should be obvious to you if you have been buying high and selling low, like in late 2008 or early 2009.

Whether your investments are in a regular brokerage account or a retirement account, you need a sound personal policy defining your goals, time horizon, and tolerance for risk. And if you don't have a plan for allocating, diversifying, and choosing your investments you are making a serious and costly mistake. There are numerous studies that demonstrate the high price that amateur investors pay when they don't have an investment plan and haphazardly buy and sell stocks and mutual funds at the wrong time, primarily when they are driven by fear and greed rather than good investment sense.

· Don't have a valid and updated will. Either you leave a valid will, or the state will dictate the distribution of your assets, and that may not be in accordance with what you want. In many situations you may also need a revocable living trust. Ask your attorney.

· Don't participate in your employer's 401(k) plan. You are responsible for your own retirement funding, so don't put it off. And be sure to contribute at least enough to earn the maximum employer's matching contribution.

· Don't have a liquidity fund (money market account, CDs, etc.) equal to at least three months' disposable income. Six months is even better. Don't keep yourself on the edge.

· Don't have adequate life insurance to meet your family's financial needs in the event of your death. Don't be na ve enough to believe that "it can't happen to you." Too many surviving families struggle to make ends meet because the breadwinner did not own life insurance. Accidents happen.

· Don't have a Section 529 college-funding program for your children or grandchildren. College expenses are rising at twice the rate of inflation, and college pays off. Studies show that college graduates, in general, earn more and lead happier lives.

· Don't know your "full retirement age" and expected income from Social Security and pension(s) at retirement. How can you plan for retirement without knowing what you can expect from Social Security?

· Don't have long-term care coverage as part of your health insurance program. Unless you are too poor to pay the premiums or wealthy enough not to need it, buy long-term care insurance before you get too old to afford the premiums.

· Don't have a "living will" indicating actions to be taken (or withheld) in the event of illness or accident. Your loved ones shouldn't have to make these decisions for you. Would you want to be kept on prolonged life support with no chance of recovery?

· Don't have a durable power of attorney, giving someone the ability to make financial decisions on your behalf. You could end up spending a lot of money on court and conservatorship fees while your bills go unpaid.

Source: http://www.montereyherald.com/business/ci_19254478