Financial benchmarks need to adjust with the times
Many personal financial benchmarks still used today were developed and implemented by the greatest generation.
In the years that followed World War II, our country's middle class experienced times of steady employment, generous benefits and most importantly, employer-paid pensions.
These factors influenced personal finance bench marks for savings, borrowing and insuring.
Over the years a lot of things have changed that require some substantial adjustments to some of these older financial benchmarks.
Let's look at just a few:
<h3 class="briefHead">Retirement savings benchmarks</h3>
It's safe to say the days of employer-paid pensions are long over. The 401(k) and other such retirement programs offered today have put the responsibility on the employee to save adequately for their own retirement. Social Security with a pension was to provide a baseline for retirement income.
Additional savings of 10-15 percent of annual income was also recommended. Removing employer-paid pensions from the equation requires additional savings as a necessity. The benchmark for saving should be 20-25 percent of annual income.
<h3 class="briefHead">Borrowing and/or housing benchmarks</h3>
Spending 35 percent of pretax income has been the conservative recommendation for housing expenses (mortgage, property tax, home insurance) for many years. With the necessity of self-funding more of one's retirement and the inevitable expenses (new roof, appliances, hot water heater, etc.) that come with homeownership, 25 percent or less of pretax income is the new recommended benchmark.
Lowering monthly housing payments also protects homeowners if they experience an income disruption due to a layoff or disability.
<h3 class="briefHead">Life insuring benchmarks</h3>
When the existence of pensions took care of retirement income the focus of life insurance dealt with the immediate financial needs of survivors in the untimely death of a breadwinner.
The amount of life insurance was calculated using a "needs analysis," which attempted to determine the money that would be necessary to keep a family's finances intact until Social Security and pension benefits became available.
More generous plans might have included other financial objectives, such as college funding for children.
Given today's different challenges, and substantial changes in the life insurance product offerings, the concept of "human life value" is used to measure one's life insurance wants. Human life value utilizes a present-value calculation based on an estimation of one's lifetime earning potential.
The most effective way to provide what the insured wants is to give survivors the full economic replacement value of the insured individual. Because one's insurability tends to decline with age, insuring for human life value as soon as possible, is always recommended.
Granted, every personal economy is different, but certain key aspects of financial management, if followed, will give you a better opportunity for success under most circumstances.
• Thomas J. Walsh is president and principal of TW Group Inc., an independent insurance and financial services agency in Westmont.