How to prepare your clients for life stages

RA: Should clients be putting away money in a savings account, or how should they be preparing?

Henderson: It depends on the situation. A credit card is really a bad way to pay for most any large expenditure. I think a case can be made to use home equity. I also think it’s a good idea to use a cash value life insurance policy because you can borrow that money from the insurance company and they put a lien against your policy. Usually, it’s at a pretty competitive interest rate. You can pay it back, and, with most policies, you’re not going to lose a lot of growth.

RA: How does the policy work in this case?

Henderson: Let’s say the client has a $100,000 cash value in their policy, and they want to borrow $25,000. They borrow $25,000 from the insurance company and put a lien against their policy, depending on whether it’s whole or universal life. Then, they can actually pay that money back into the policy, and they remove that lien or reduce it as they go along. With a lot of polices, you end up right back where you were without losing growth.

RA: What about using home equity?

Henderson: Sure. Another good way to come up with some money is dipping into a home equity. If they don’t already have the money available in a savings account this could be a good option. But clients have to be careful because with rising interest rates, that option could potentially be less appealing here soon. It’s mainly about planning early and making sure those sources are available.

RA: Say someone did take a loan out from their 401(k) account, what would be the consequences to that?

Henderson: If they have a 401(k), most have a loan provision to borrow up to a certain percentage of the account balance or $50,000. They have to pay that loan back. If they don’t pay it back and leave work for whatever reason or are under the age of 59 and a half, it could become potentially taxable. There could also be less growth because the money is out of the account for a certain period of time, which ultimately results in less money for your retirement.

RA: With weddings, why do you think it’s easier to wreck a retirement income?

Henderson: Emotion can play a larger role in a wedding than it does, for example, in a college education. That’s more of a financial decision where you say “well geez, we’re going to contribute a little bit to your college and you’re going to have to take out loans for the rest.” When it comes to a wedding that seems to be more of an emotional decision-making process from the conversations I’ve had with numerous people. We don’t always make good decisions, whatever it is, when emotions are involved.

RA: What are some of the biggest financial pitfalls people run into if they aren’t pre-planning?

Henderson: The sandwich generation is a common pitfall, specifically when taking in adult children. We had a friend whose child came home and didn’t want to work. Luckily, she is working now but that could have become a huge problem. Adult children can financially drain any parent.

Another pitfall would be in leaving your money out of the market. If you don’t start saving until you’re 40, you’ve given up 15 to 20 years when that money is not growing for you.

Once that pattern of not saving is in place, people begin making emotional decisions with their money: They pull their investments out of the markets at the first hint of an economic downturn. That’s an emotional decision that can cost you a happy retirement.