Connecting the Dots

Jonathan Clements

MANY OF US ENGAGE in mental accounting, thinking of our mortgage as separate from our savings account and our job as unrelated to our portfolio. But these are all pieces of our sprawling financial life—and it’s important to understand how everything fits together. Here are 12 examples:

1. If you have plenty of cash in the bank, you can probably raise the deductibles on your auto and homeowner’s insurance.

2. If you’re inclined to buy bonds, you’re likely better off paying down debt instead. After all, the after-tax cost of your debts is typically higher than the after-tax interest you can earn on bonds.

3. If you’re married, you have less need for disability insurance. Why? If you can’t work because of illness or injury, your spouse’s income may keep the family solvent. But if you’re single, you won’t have that financial backstop—and a disability could cause your finances to quickly unravel.

4. If you work in Silicon Valley, your family’s finances are heavily exposed to the tech industry, so you should think twice before investing significant sums in tech stocks. The same logic applies to doctors and health care stocks, realtors and rental real estate, and investment bankers and financial stocks.

5. If you have children, there’s less money for everything else. One result: You’ll likely retire later.

6. The more wealth you’ve accumulated, the less need you have for long-term care insurance, because you may be able to pay nursing home costs out of pocket.

7. If you have a steady job with a decent salary, you can take the risk of investing heavily in stocks, because there’s little or no need to own income-generating investments.

8. The higher your fixed living costs—we’re talking items like car payments, property taxes and rent or mortgage—the less financial breathing room you’ll have. That means more financial stress and potentially more difficulty if you find yourself out of work. One precautionary step: Build up a larger emergency fund.

9. If you save a large percentage of your income, you need a relatively small nest egg to retire in comfort. The reason: You’re used to living on a modest portion of your salary, so you might be comfortable retiring with just 60% of your preretirement income, rather than the 80% that’s often recommended.

10. While insurance needs tend to wane as our wealth grows, umbrella liability insurance is the exception: The rich make a more tempting target for the litigious.

11. If you’re retired—or no longer have a financial need to work—there’s no need to keep much, if any, emergency money. Why not? The No. 1 reason to have an emergency fund is to cover costs during a spell of unemployment.

12. If your adult children have high incomes, you may want to spend down your traditional IRA and bequeath them other assets. The reason: If you leave them your traditional retirement accounts, they’ll have to pay taxes at a steep rate when they draw down the accounts.

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