40 Financial Things to Know by Age 40: Part One

Knowing these key financial things can help you manage your finances today and lay a solid financial groundwork for your next 40 years.

Insurance
Do you need life insurance? 

Not everyone does. You may not need it if you do not have a spouse or young children or if you have saved enough to provide for your loved ones. But if you have people who depend on you financially and who would struggle without your income, life insurance can be a good solution.

How long your disability insurance will pay out.

Some employers only offer short-term disability insurance, which replaces part of your income for three to six months following a disability. Unless you also have long-term disability insurance or other resources to see you through several years of being unable to work, consider purchasing a long-term disability insurance policy that kicks in after the payouts from the short-term policy stop.

How to beef up your liability coverage.

The more you own and earn, the more you have at risk from a lawsuit if someone is injured on your property or while you are driving. Primary insurance policies, such as homeowners, auto, and boat, generally limit liability coverage to $100,000, $300,000, or $500,000. You can expand your coverage and help protect your assets in a major lawsuit with personal umbrella insurance – a type of policy that provides additional liability coverage beyond the limits of your primary insurance policies.

Standard homeowners insurance does not cover damage from flooding.

For this type of coverage, you will generally need a separate flood insurance policy.

Credit

Why your credit reports matter.

The information in your credit reports, such as your payment history, how much you owe, and how long you have used credit, is used to calculate your credit score, a gauge that lenders use to judge whether you are a good credit risk. A higher credit score improves your chances of qualifying for credit and may result in a better interest rate.

How to get free credit reports.

By law, you are entitled to a free copy of your credit report from each of the three credit reporting agencies – Experian, Equifax, and TransUnion – once every 12 months. You can get your reports online at www.AnnualCreditReport.com or by calling 1-877-322-8228. It is a good idea to review your reports annually for accuracy and signs of fraud.

The best way to improve your credit score.

Paying your bills on time is the most important thing you can do to improve your credit score. It also helps to keep your credit card balance well below your credit limit and to not apply for more credit than you need.

Retirement Planning

How much you may get from Social Security.

To learn how much you may receive in benefits when you retire, take a look at your Social Security Statement. You can review it at any time by creating a “my Social Security account” on the Social Security Administration’s website, www.ssa.gov. If you prefer not to create an account, the Social Security Administration will mail you a statement at ages 40, 45, 50, 55, 60 and each year after that until you begin receiving benefits. Reviewing your statement provides an opportunity to correct any errors in your earnings record, which is important because your benefits will be based on it. Plus the statement serves as a great reminder of the importance of your own savings in helping to ensure a financially secure retirement.

How much money you need to retire.

Although you may not retire for another twenty or thirty years, estimating how much money you may need to support the retirement you envision can help you determine how much you may need to save each month. While there are calculators on the Internet that can provide rough numbers, the better approach is to consult your financial advisor, who can review your financial situation and goals, help you determine how large a nest egg you may need, and create a financial plan for moving toward that amount.

Starting to save earlier can make a big difference.

The longer the earnings on your investments have to compound – that is, potentially generate earnings themselves – the less income you may need to contribute to reach your savings goals.

To illustrate this point, let’s take a look at two hypothetical investors: Sarah and Jay. Both invest the same amount - $2,000 per month for twenty years – and earn the same rate of return – 6% annually. However, Sarah invests $2,000 per month from age 40 to 60, and then leaves the money in her account where it continues to compound until she retires at age 70. Jay gets a later start, investing $2,000 per month from age 50 to 70.

Despite contributing the same overall amount and earning the same rate, at age 70, Sarah’s savings amount to approximately $1.69 million and Jay’s to $929,000 simply because Sarah’s savings had ten more years to compound. For Jay to accumulate Sarah’s amount by age 70, he would have needed to invest about $3,640 per month - $1,640 more per month than Sarah. (This is a hypothetical example for illustrative purposes; your results may vary.)

The Free Application for Federal Student Aid (FAFSA) can be filed as early as October 1 this year.

And you can use the income information from your 2015 tax return to complete it.

With offices in Williston and Rutland Vermont, Copper Leaf Financials’ team of experienced financial planners work with clients to assure that all of the vital components of your financial plan are in order – from estate planning to retirement planning. We can help you put all of the legal documents in place to ensure that everything goes according to your plan. For more information call 802.878.2731.