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Financial Literacy - Securing retirement Click Here
Taking protective measures
A sound financial plan consists of ample savings, insurance and an asset allocation plan, among other things.
Securing retirement
  Money makeover: The plan
The plan: Fine-tuning the financials
Alice G.
Profile: Alice G.
The problem:
Alice has health care concerns that she wishes to address from a financial planning standpoint.
The plan:
Proper insurance planning and understanding of health care solutions will help provide near-term and long-term solutions to her planning.

As long as Alice works for an employer that provides a decent health care plan, her financial situation should remain sound. However, she must plan for the possibility that she may no longer be able to work. In such an event, she should get COBRA coverage with the state. It isn't cheap, but it does provide her with the ability to obtain coverage regardless of insurability. This is particularly important in her case.

COBRA is a stopgap measure, however, that will tide Alice over for 18 months, during which she will have to shop for private health insurance (unless universal health care becomes a reality). Buying private health insurance is tricky business even for healthy consumers; for those with current health issues, it can be very challenging, since in most states companies can deny coverage for pre-existing conditions. However, a few states prohibit companies from cherry-picking consumers in this way. Alice should check with her state insurance department to see how the rules work where she lives.

At age 65, Alice would be eligible for Medicare, which would pay for some expenses, such as hospitalization. She would need to carry Part B for doctor visits, outpatient services and other medical expenses, as well as Part D, the prescription plan. Those costs are fairly reasonable considering her pre-existing conditions. This assumes of course that Medicare costs and services in the distant future will resemble those of today.

The plan in 3 steps
Beef up emergency fund
Emergency fund must be larger than usual-- about the same as a year's salary.
Consider moving money from taxable account to a money market account or CD.
Add to emergency fund until it reaches $90,000.
Continue to maximize investments in tax-favorable retirement accounts.
Tip: Stash emergency fund proceeds in a high-yield certificates of deposit or a high-yield money market account. Check Bankrate's Safe & Sound bank ratings first, and know the rules about FDIC coverage.
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Check out the disability plan
Alice's current disability plan allows for continuation of coverage should she leave her current employer, although I would recommend that she check the terms of those conversion rights. The coverage is for an "own occupation" definition for two years and then any occupation after that to age 65.

This means the disability would kick in for two years if she were unable to fulfill the job duties of her current occupation as an engineer. After two years it would stay in effect only if she were unable to do any type of work, given her education and skills. This might force her to find employment that is less demanding and less remunerative. If the policy contains a residual benefit, the insurance would make up the difference in income that she would receive from the less demanding job.

Beef up emergency reserves
Because of Alice's health concerns, she has a higher emergency reserve requirement. When typically three months' expenses might be a reasonable emergency reserve amount, Alice should save three or four times that amount. Based on her annual salary, Alice should have roughly $90,000 tucked away in a fairly liquid taxable account. Because the stock market is a risky place to invest any money that may need to be accessed within five years, these funds should be invested in banking products such as high-yield certificates of deposit or in a high-yield money market account. This money may be a perfect investment for an Internet bank account since no brick-and-mortar expense means a higher interest rate on short-term money and FDIC insurance.

Alice has roughly 15 percent of her assets in a taxable account which is invested in Vanguard Target Retirement 2045 fund. She might consider selling that fund and using the proceeds toward her emergency reserve requirements.

Take inventory of investments
Alice also has an old retirement plan with a previous employer and she participates in her new employer plan, contributing the maximum amount allowed annually ($15,500 for those under age 50). About 26 percent of her assets are in her former 401(k), and about 5 percent are in her current 401(k) plan at work.

In addition, Alice has 39 percent of her assets in two Roth IRA,s and 7 percent in a traditional IRA, 5 percent in CDs and 3 percent in a bank account. Her retirement investments, which make up more than 75 percent of her assets, are in mutual funds.

Over the last few years Alice has begun considering a strategy of coordinating risk and return expectations with the accounts she expects to access first in retirement. For example, since she expects to access the Roth IRA account last, due to its tax-free growth, she invests in riskier funds within that vehicle. In the event of a market downturn, her investments would have plenty of time to recover. Her taxable account should be invested most conservatively, since she would most likely tap those funds first. I have to hand it to Alice: This is very clever thinking.

  The problem

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