Why it pays to start planning earlier rather than later
As we grow older we learn that experience provides many things, including the importance of delayed gratification. However, with ongoing economic woes, having cash today (“just in case”) can feel more important than saving for retirement 20, 30, 40 years from now. So, even though we know we’ll need savings to enjoy retirement, we often choose to procrastinate.
And there is a price to pay for delaying. With concerns about the future of Social Security and the end of most company pension plans, we can no longer afford to wait and see what happens. In short, if you haven’t already, now is the time to start saving. The longer you wait, the more you are liable to lose in terms of prospective gains—money you will definitely need when you are no longer receiving the income.
Let’s compare a 22 year old woman who begins saving fresh out of college to a woman who waits until she is 35 years old, realizing—after she is married, has a mortgage and started a family—that she should begin putting money away as soon as possible.
Assuming a hypothetical annual rate of return of 3%, an investment of $5,000 each year and adjusting for inflation and annual compounding, the 22-year-old will reap $458,599, whereas the 35 year old who waited 13 years will end up with $257,514, approximately $200,000 less.1 As you can see, with investment planning the cost of waiting can be expensive over the long run. However, there can also be a cost of waiting when it comes to insurance planning and the legacy you want to leave for your loved ones.
As anyone over 35 knows, life is full of many surprises— car accidents, health emergencies, family tragedies, theft, the devastation after a natural disaster. With each incident and every new bill, it becomes much harder to save.
Let's consider one more example, using the purchase of life insurance. Trish, who just turned 40, decided to purchase some permanent life insurance coverage and is considering a $250,000 whole life policy. Today, Trish's annual premium would be $4,000, but she's debating whether or not to wait five years, at which point her premium would be $5,000.
However, although the total premium paid would balance out by age 65 for each scenario ($4,000 for 25 years, and $5,000 for 20 years—both total $100,000), choosing to wait would have a negative effect in several key areas.1, 2
Since, a whole life policy offers the benefit of tax-deferred accumulation of cash value, the sooner Trish starts, the faster her cash value can potentially grow over the long term. With each premium payment, cash value builds. Over time the cash value can grow and she could access, in the form of a loan, to help with a major purchase such as a home or a car, or to meet any financial need that might arise.3
Also, a whole life policy from a mutual company such as New York Life, is eligible to earn dividends if declared. Trish could use those dividends to purchase additional insurance to enhance her total death benefit. Postponing her pending purchase would ultimately mean that she misses out on five years of potential dividends, as well as the opportunity to increase the benefit paid to her beneficiaries.
Finally, waiting five years can also jeopardize Trish's insurability. Although she's insurable now, an unexpected change in health could very easily change that status.
For all these reasons and more, there is no better time to begin planning than the present. Unfortunately, most people fail to recognize the enormous increase in value that can result from beginning to plan earlier than later.
For now, time is on your side. Free of charge, New York Life offers a financial checklist and filing system—LifeFolio System: Your Lifetime Financial Organizer—that can help you organize what you have, as well as help you identify what you may need down the road.
1. Of course, this example is illustrative only and uses a hypothetical assumed rate of return for illustrative purposes. Generally, the returns of investments fluctuate. These results also don’t accounts for taxes or invesment fees.
2. Life insurance is subject to underwriting; your insurability and premium amount are dependent upon many factors including age and your health.
3. Policy loans accrue interest and reduce cash value and death benefit.
In Oregon,New York Life Whole Life policy form number is 208-50.27