A new and useful idea is starting to enter the realm of financial planning. It's known by the catch-all phrase, "real options." Planners are applying it to investments, taxes, debt, insurance everything.

For every one of us, life events are unpredictable, including the length of life itself. Yet we're often asked to make decisions as if we know what lies ahead. That leaves us out on a limb, unprepared for change.

When you were young and questing, your parents might have advised you to "keep your options open." This new approach to planning builds on that common-sense advice.

When you keep your options open, you deliberately wait before making a final choice. Waiting is often smart, when the action you're asked to take is expensive or impossible to undo. As a simple example, you might wait to marry, because of the high cost of divorce.

I don't mean procrastinate, by the way. I mean deliberately delay a decision, in case your life changes or better choices turn up.

"Real-options thinking puts a high value on flexibility," says Glenn Daily, a fee-only life insurance planner in New York. If you have to make a decision, lean toward the choice that keeps more of your options open.

All this is pretty abstract. So let me give you some real-life examples of how real-options thinking works:

Case one. You're in your early 20s and earn a modest wage. Everyone says you should save for retirement, in an IRA or 401(k). On the other hand, you might need cash to repay student loans, marry, move or buy a house. If you have to take money out of your retirement plan, you'll pay a 10 percent penalty.

Most 401(k)s let you keep your options open, because you can borrow against them if you must have cash. A Roth IRA is flexible, too, because you can take out your own contribution at any time.

But traditional IRAs usually penalize you for early withdrawals. They're pretty inflexible for the young, so they're less attractive.

Case two. You've always had term life insurance and are now middle-aged. You're thinking of switching to a cash-value policy, which you could keep, at a fixed premium, for the rest of your life.

But why act now? You can preserve your options by buying term insurance that's convertible into cash-value coverage, up to age 65, Daily says.


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