We have seen more than our share of financial circumstances with tragic outcomes. Almost all of them could have been avoided by having a Finances Baseline.
These predicaments, ranging from terminated long-term care insurance policies and taxes on excessive capital gains to bank problems and fraud, are mostly caused by our clients’ misperceptions of their actual financial life. Here are some examples…
Long-Term Care Insurance (LTC)
Several of our clients could have saved hundreds of thousands of dollars in out-of-pocket payments if they had retained long-term care insurance. However, their premium payments over many years were wasted when their policies lapsed because they were inattentive to their bills.
Capital Gains Tax Liability
Understanding how capital gains affect taxes is key in smart investing.
When a couple switched to a new investment manager, he adjusted their stock holdings. These investment activities, possibly having merit from financial risk management or market perspectives, were not well-matched to the couple’s financial needs. They hadn’t informed the investment manager that their portfolio would soon be needed as a source of funds for home health care expenses. With that in mind, the portfolio manager might have made different investment decisions.
In addition to not making their needs known to the investment manager, the couple did not comprehend the tax ramifications of large capital gains. So, they now face an outsized tax liability and are challenged to come up with the funds.
Using an obsolete checking account can have dire consequences on your financial life.
One woman’s checking account had become inactive because her bank had been merged into another financial institution. However, she had not processed this fact due to her declining cognitive skills, so she was still writing checks on the inactive account.
As a result, the woman lost access to her credit card account, her homeowner’s insurance was canceled, and she had trouble restoring service with utility companies.
People’s finances, identities, and reputations are constantly under attack through social media, phone calls, text messages, emails, and even in-person.
Victims of these fraudulent practices can have their entire personal and financial lives devastated, yet many are not even aware that they’ve been duped, or how.
Minimize Your Risks. Establish a Finances Baseline.
A Finances Baseline is an honest look at what you have, what you earn, and how you spend. It is not your budget, nor is it what your finances should be. It’s the reality of what they are today.
Setting up a Finances Baseline is akin to what we typically recommend to our aging yet healthy clientele. We encourage them to consult with a geriatric care manager (a.k.a. aging-life-care professional) to establish a baseline for measuring health changes.
Having a truthful, all-encompassing view of financial reality would have made a substantial difference in the examples we’ve highlighted. With a Finances Baseline, those who experienced painful financial outcomes could have achieved a more secure footing.
How Do You Set Up a Finances Baseline?
Creating a Finances Baseline can be done at any stage of life.
- As you launch your working life
- During your prime earning years
- At a pivot-point caused by divorce or loss of a spouse
- Helping aging relatives who may not be competently managing their own financial affairs
The project of establishing a Finances Baseline takes some time and dedication. You’ll need to dig through physical and digital historical documents and approach the forensics from several different angles.
Having a partner in this Herculean task can be very helpful. They can pick up on important details you might miss and help you stay focused.
To begin with, setting up your Finances Baseline would involve exploring a myriad of financial records. These include, but are not limited to:
- All financial transactions for at least a year
- Tax returns for at least three years
- Insurance policies
- Benefits from current and former employers
- Beneficiaries on retirement and life insurance accounts
- Passwords and two-factor authentication credentials
- Accumulated mail
The next step is to organize information – income against expenses, credit card debt features, mortgage rate, details of financial accounts, and progress toward savings goals. Doing this helps identify action items and simplify a potential hand-off of responsibilities to someone else.
In short, a Finances Baseline documents the moving parts of your financial life.
Setting up Guardrails
A clear presentation of your financial reality offers the opportunity to act upon looming problems and ensure important things do not fall through the cracks, especially prior to potential cognitive decline.
We have seen that this process improves financial health by putting up guardrails against loss by:
- Ensuring notifications to a third party about critical bills such as insurance premiums (LTC, home, auto, life, etc.) and utilities. We have a helpful worksheet for this process.
- Listing automatic deposit and payment activity, prompting you to update in the event of a change of accounts
- Restricting computer access to authorized users only by establishing safe passwords and an easily updatable retention system
- Setting up two-factor authentication
- Updating beneficiaries following a life event, such as the birth of a child, a divorce from a beneficiary, or the death of a beneficiary
- Defining estate plan objectives (i.e., establishing how your money will pass to subsequent generations, charities, etc., and who will handle your financial and medical affairs while you are living but incapacitated)