Rating your fiscal fitness - Finance

USA Today (Society for the Advancement of Education), Dec, 2001

You exercise five days a week, watch your diet, get enough sleep every night, and have an annual physical exam. You pride yourself on being physically fit and taking good care of yourself. You want to be in shape to enjoy your retirement and later years of life.

What about your financial health? Do you spend as much time and care on your finances, especially planning for retirement? Financial professionals will remind you that retirement planning, like an exercise and workout routine, is an ongoing process. You start with a goal, monitor your progress, and make adjustments along the way to meet new goals and opportunities.

To gauge your fiscal fitness, take the test below from KeyCorp, a Cleveland-based financial services company, and see how you rate. Give yourself one point for each "yes" answer to each question. For a category with multiple questions, give yourself a point for each individual "yes" answer.

Start with a current inventory of your finances. This will help to identify those areas you may have overlooked and areas where you may need extra help. Your inventory should include:

Financial accounts. Do you have a complete list of your accounts and their balances--i.e. savings, checking, interest-bearing money market, mutual fund, brokerage, and certificate of deposit accounts?

Emergency funds. If you lose your job or suffer an illness, do you have at least three to six months of income available to you on short notice?

Documentation. Do you have a will and a durable power of attorney, for both your finances and medical care? Are these updated to reflect your current wishes? Does someone know where these documents are located?

Insurance. Have you planned for yourself and your loved ones in case of an emergency or unexpected disability? Life, health, disability, and homeowner insurance are the most important areas to start, and there are variations within each.

Education. If you have children, do you have a savings plan to finance their education? It's not just about college savings anymore. Many parents look to send their offspring to private schools as early as kindergarten.

Retirement plan. Do you know at what age you want to retire? This answer most significantly impacts what you need to save so that your retirement dreams become a reality. Many financial websites have calculators to help you determine the amount you will need to retire.

Financial planning. Do you currently have a financial plan? Do you have a financial advisor or trusted professional, such as your banker, working with you?

Now that you have your basic inventory completed, it's time to move to the next level and begin targeting specific areas for saving.

Financial accounts. Are you properly diversified within your current mix of savings and investments? A time-tested strategy, diversification means appropriately allocating your assets among different types of investment vehicles, such as stocks, bonds, and tax-deferred and non-tax-deferred investments.

Individual retirement accounts. There are three basic IRAs: regular tax-deferred, regular non-tax-deferred, and Roth. Do you know the difference between the regular tax-deferred and non-tax-deferred? Regular tax deferred and Roth IRA? Or the regular non-tax deferred and Roth? Do you know which IRA is most appropriate for you? Almost everyone can benefit from an IRA, and contribution levels will rise in the coming years, making IRAs one of the best retirement savings vehicles available.

Employer-sponsored savings plans. Does your employer offer a deferred savings program, such as a 401(k)? Are you participating to the fullest degree possible? An employer-sponsored plan has numerous benefits. Contributions are tax-deferred, thereby reducing today's tax bill. Employers often make a matching financial contribution, up to a certain dollar amount or percentage, further increasing the size and value of your savings account. That's free money!

401(k)/IRA rollovers. If you have changed jobs over the course of your career, did you roll over your 401(k) savings into your new employer's plan or open an IRA rollover? As people change jobs more frequently, it doesn't have to affect their retirement savings negatively. If you left your savings in your former employer's 401(k) plan, you can move that money to another qualifying investment of your choosing without losing the tax-deferred benefits. A rollover is a great option for consolidating your retirement savings in one place under your control.

Insurance. Do you review each of your policies on a yearly basis to ensure that you are carrying the appropriate levels of coverage and at the best price? Have you named beneficiaries for all of your policies and accounts? As your personal and financial situations change, so should your levels of coverage. The life insurance policy you bought when you and your spouse got married may no longer be appropriate now that you have two children.

Retirement plan. Just like your insurance policies, your retirement plan needs an annual review to ensure it meets your current needs and plans. Major life events--such as a marriage or divorce, illness, education, or home purchase--all impact on a retirement plan. Do you review your plan every year? Has your risk tolerance changed over time? An annual review is critical to ensuring future success.