Don’t confuse a product with a plan
by William G. Lako, Jr.
August 28, 2014 10:15 PM | 1944 views | 0 0 comments | 60 60 recommendations | email to a friend | print
It is an easy mistake to make. Given the approach many practitioners take selling financial products, the features and benefits can sound like key elements of a financial plan. But a product, in and of itself, is not a plan. It is important to understand a product only contemplates factors associated with your money as it is invested in the instrument itself. A good financial plan considers how to manage your money throughout your life and the life of your family.

A good example of over-reliance on a product is found in 401(k) plans. Statistics say if I asked for a show of hands of who contributes to a 401(k), about 88 percent of you would raise your hand. If I asked those who contribute whether you understood how your 401(k) investments fit into your overall plan, experience has taught me a very small percentage of you would be able to keep your hand raised.

Contributing to a 401(k) does not constitute a financial plan. It is a smart thing to do, but a wise person views their 401(k) investments in light of an overarching strategy that accounts for when you will need your money and how long it will last.

Again, saving to an employer-sponsored retirement plan is very smart. On average, 401(k) plans offer 19 different investment options, including equity funds, bond funds and sometimes company stock. Given your choices are limited, allocation amongst the right asset classes is as important as fund selection. How you allocate your portfolio should be based on your time horizon and risk tolerance. From our perspective, if you have more than 10 years before you will need to access your money, it should be invested in equity investments. If you will need to access any portion of your money within the next 10 years, you should invest that portion of your portfolio in fixed-income investments, exposed to meaningfully less risk.

A comprehensive financial plan can help you determine how much of your money you will need to access and when. A stand-alone product cannot answer those questions.

Insurance is another area where investors may mistake a product for a plan. The purpose of insurance is to mitigate the financial risk of experiencing a catastrophic event. Young families often purchase term life insurance to provide replacement income or pay off debt in the event there is a death in the family. Certain permanent life insurance policies are sometimes considered because these can build cash value, which you might be able to borrow to generate tax-favored income in retirement.

Insurance is a product, not a plan. Your life insurance coverage should be reviewed and monitored consistently in light of your overall financial plan. In particular, the cash value in a permanent policy needs to perform well to achieve the assumptions projected when the policy was put in place. This should be reviewed every 12 to 24 months to ensure performance is adequate. The successful execution of a financial plan can be put at risk if your insurance policies aren’t properly managed.

Products are the tools with which a plan is carried out. Take the time to put them in the proper context, and use them in service to a well-designed, comprehensive plan.

William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University’s Coles College of Business and a principal at Henssler Financial. Mr. Lako is a CERTIFIED FINANCIAL PLANNER™ professional.

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