Iowa Fiduciary

Prepare Your Finances for the Unknowns

What’s the secret to a more successful retirement? Making the unknowns known. 

“There are known knowns. These are things we know that we know. There are known unknowns. That is to say, there are things that we know we don’t know. But there are also unknown unknowns. There are things we don’t know we don’t know.”Donald Rumsfeld

One of the most important things to remember when your financial circumstances are in flux, is that it’s impossible to predict when or how the next market correction will occur. It could happen in a few weeks, months, or it could happen in a few years. When these things happen it affects everyone. It doesn’t matter if you’re a young millennial, an older baby boomer, or somewhere in between.

What does all this mean? Simply put, you should take the proper steps to be more prepared for whatever the current state of affairs is. Here’s a look at some ways you can practice preparedness for when financial uncertainty occurs.

Keeping Cash at Hand

Even if you feel like you have enough money to navigate the unknown, it can’t hurt to have more cash on hand. Cash is a valuable asset because it gives you flexibility and peace of mind. If there’s a large, unexpected expense, you may not need to take out a loan. If you’re out of work for a year, you may not need to sell your home.

That said, having too much cash can also be dangerous—you might miss out on investment opportunities or get stuck with an interest-only mortgage.

There are two main reasons to keep cash: retirement, and unexpected expenses.

  1. As we age, it’s important to save money for retirement. We may also have other financial goals like saving for a child’s college education or buying a home for your children. Put away as much as you can to compensate for these large expenses. Once your money is saved, reach out to your Fiduciary advisor for ways to help see your money grow.
  2. Secondly, there are unexpected expenses we face every day, from medical bills to car repairs and replacing broken appliances. The best way to help prepare yourself financially is by making sure you have enough saved up in your emergency fund so that when these things happen, they don’t completely derail you financially—you’ve got the money ready!

Having Financial Flexibility During Periods of Financial Stress

Plans that don’t bend ultimately break. Adding more conservative assumptions to a financial plan helps provide cushion against unknowns. Which is why flexibility is a great asset to have, both in your personal and professional life. It can help individuals adapt to changing circumstances and can minimize the disruption in your life.

Spending money is pretty much inevitable. And while there are many thoughts on how much you should have saved at every age, the race to build wealth can make it hard to focus on the here and now. This is why it’s important to have some financial flexibility. Having financial flexibility doesn’t mean loosening the reins and throwing caution to the wind when it comes to your money. It means striking a healthy balance between planning for today and the future.

In general, high fixed expenses relative to your overall income limits your ability to adapt as your investments, goals, or finances change. And during periods of high inflation or market volatility, the negative effects of over-spending are magnified. A strong savings rate relative to your income can help you build reserves before retirement—and during retirement. Remember that life is uncertain and good planning should account for that. Know what direction you want to head in, save money and give yourself the benefit of having options when there is a fork in the road.

Test Your Financial Plan Against Bear Markets

As you work to help secure your retirement, you’ll need to help ensure your plans are flexible enough to account for the unexpected, and many investors didn’t see a bear market coming.

Bear markets are nerve-wracking for any investor, but especially for retirees or those close to retirement. Making the right moves with your investments and retirement plan is key when the stock market is in free fall like it has been. A recent study conducted by Vanguard estimates that entering retirement during a bear market with a balanced portfolio and relying on that portfolio for 100% of your income, while making withdrawals when stocks are down, could increase the chance you outlive your money by 31% and help reduce your income stream by 11%.

During a Bear market, you should plan conservatively and for a range of outcomes. While being conservative can’t fully insulate an investor from the impact of short-term events, it can help investors understand the probability of outcomes by stress testing a financial plan to better assess the likelihood of success over the long-term. 

Planning for a Recession with Diversification

When you have a diversified portfolio, it’s important to stay the course. Having the right mix of assets in your portfolio can help you avoid panicking during market fluctuations. In fact, having a mix of assets can even increase your odds of staying the course by increasing your flexibility and reducing risk. When you own a variety of assets—such as stocks, bonds and real estate—you’re not just betting on one thing.

You can also use this strategy to manage risk during volatile markets. However, caution is advised when rebalancing during periods of extreme volatility because it could trigger capital gains tax liabilities for investors who sell winning positions at a loss or vice versa.

Here are a few things investors may consider so that volatile events hopefully won’t feel as tumultuous as they appear to be:

  1. Diversify Your Portfolio: As well as diversifying stocks, it might also be a good idea to be diversified across asset classes (which can include corporate bonds, government bonds, and futures).
  2. Determine Risk Tolerance: Different investors are at different stages in their life. Risk tolerance is a personal choice, but it’s good to keep perspective on personal time horizons, and manage risk according to when access to funds from different assets is needed.
  3. Portfolio Insurance: Portfolio insurance is the strategy of hedging a portfolio of stocks against market risk by short-selling stock index futures. Short selling index futures can offset any downturns, but it also hinders any gains.
  4. Remain Calm: As mentioned at the start of this article, it is very easy for an investor to lose their head in the madness of dramatic market moves—but it’s important to realize that this is just part of how markets work.

Final Thoughts

By its very definition, unknowns can’t be meticulously planned for. But if you give yourself enough of a margin for the uncontrollable, with other adjustments, you can work to control the impact the economy has on your retirement plans.

In an uncertain market environment, it’s important to make sure that you’re taking steps towards a more secure retirement. After all, there’s no way to fully insulate your finances from a sudden shock to the markets. But there’s no doubt that diversification and prior planning can help prepare you to manage the change.

At Johnson Wealth and Income Management, we believe in helping our clients pursue their life goals by offering them the peace of mind that comes from knowing we are working hard to manage any financial challenges or opportunities. We also have a commitment to educating our clients and communities on topics related to more conservative investment alternatives.

If you want professional guidance on how to make the most out of your finances during uncertain times, contact us here today!

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