Over the years, good times and bad, a statistical constant tells us only 4% to 5% of Americans will achieve financial independence by retirement age.  That leaves 95% destined to be financially dependent.  What is it this small minority does (and the rest does not) that sets them apart?

Income, of course, has something to do with it.  Indeed, adequate earned income is an imperative.  However, income alone is not the answer.  The world is full of people who, in spite of substantial incomes, never attain financial independence.  Some form of strategic planning must be imposed before there can be realization of wealth potential.

 A number of roadblocks and hazards exist on the road to financial independence, not the least of which are the five “shuns”:

•  Taxation
• Inflation
• Temptation
• Procrastination
• Speculation

Most people tend to focus on where to put money, when they should be first asking, “Why am I investing?” and “How much should I be investing?”  Specific long term and short term objectives must first be established.  If you do not know where you are going, you are going to end up somewhere else.  As Stephen Covey says, “Begin with the end in mind.”

Once goals have been pinpointed, a strategy may then be devised.  Current assets are inventoried and evaluated.  Are the assets balanced and coordinated?  Is each asset contributing toward the stated objectives, or should there be a strategic repositioning of some of those assets to help accomplish multiple objectives?

One of the cornerstones of wealth accumulation planning is protection.  You must first protect the assets you already have.  Insure your home, car and other personal property by carrying liability insurance.  Insure your income against a disability.  Purchase life insurance, keeping in mind that life insurance does not insure lives.  Seat belts insure lives.  Life insurance insures a standard of living, a way of life dependent upon continuity of income that will someday stop.

Life insurance also functions as a conservator of estates.  This use accounts for the explosive growth in the number of million dollar and multi-million dollar policies purchased today.

 Savings in one form or another is necessary before wealth accumulation can occur.  Many people try to invest first and then save.  This is like putting the cart before the horse.  Is there sufficient liquidity, for example, to provide for at least six month’s income should an emergency arise?  Suppose a financial opportunity presents itself?  Is there sufficient reserve with which to take advantage of that opportunity?

Ironically, when it comes to savings and investment, the least productive assets tend to be the most liquid.  Moreover, the potentially most productive assets are the least liquid.

Life insurance is an integral part of any wealth accumulation plan.  The first thing to be decided:  Is the need for life insurance temporary or permanent?  For a short term need, term insurance is best.  If, on the other hand, the need is long term, temporary insurance will just not solve a permanent problem.

Many people seek riskless investments.  Unfortunately, no such thing exists.  Even those averse to risk unwittingly risk “going broke safely” by putting money into something “safe” but taxable.  Taxes must be considered. Assuming a 35% combined federal and state tax bracket, a 7.5% return before taxes equals a 4.9% return after tax.

Then there is inflation.  In 1999, the Consumer Price Index went up only 2.68%.  In 1979, however, it was over 13%.  Over the past 25 years, inflation has averaged 4.82%.  After one factors in an inflation rate of 5%, the 4.9% after tax return does not fare well.  Thus, you have an investment that may be “safe,” but virtually guaranteed to lose money or only breakeven.  Offsetting the erosion from inflation is a key component of wealth accumulation planning.

What about tax planning?  How important is it?  Whether you are a victim of the tax system, or use it to your advantage, there can be no wealth accumulation without sound tax strategies. The right strategies can increase the effectiveness of your savings and investments dramatically without additional outlay of funds.

Tom Fischer is a Life Insurance Specialist in Scottsdale with over 16 years of experience.