Preparing for the worst doesn’t just mean acknowledging that life is fragile and then living life to the fullest. You need to prepare for financial risks. This means assessing your exposure to risks beyond your control and then getting protection if you need it. If anyone relies on your life and/or your income stream, then you need to have insurance policies to replace that income if you suddenly die or face a long-term disability that prevents you from working. (Read my colleague’s post on how to determine if you need life insurance.) You need cash reserves that you can draw from immediately in an emergency. You need proper homeowners insurance. You need an estate plan that allows your finances to pass to your heirs smoothly and at a low cost. (Read our director of trust’s stance on the importance of an estate plan).
This preparation won’t prevent you from being in the wrong place at the wrong time (and no such preparation exists), but it will help prevent financial risks from being created for your family and heirs should something happen to you.
I frequently interact with married clients who have disparate feelings about their goals with their money. Most often the differences center around their individual willingness to take on risk, and this tends to manifest in two common situations.
The first is centered around their debt burdens from their student loans or mortgages. One spouse may be adamant about paying off every penny of debt before considering saving for retirement, while the other is comfortable with making minimum monthly payments and investing any additional savings. In today’s low interest rate environment, we work to counsel debt-averse clients to take advantage of refinancing student loans into low fixed-rate loans to pay off over seven to 10 years and to just pay the minimum payment on a fixed-rate 30-year mortgage. This enables them to have the cash flow to take full advantage of tax-favored accounts, like 529 college savings accounts for young children or work-based 401(k) retirement plans or Roth IRAs to begin retirement savings as early as possible. With mortgage rates below 4%, we review historical illustrations with clients to show how, in many market environments, returns on an investment portfolio will likely outperform their mortgage interest rate, so they would likely be better off long-term by investing that additional mortgage payment instead of applying it to the loan.
The second example of wide differences in risk tolerance that I often see with married couples is how comfortable they are with taking on investment risk in their portfolios. This is especially true for investors in their 30s/40s who are students of the financial crisis in that they were just beginning their careers right around the time of the Great Recession (in my case, I entered the financial services industry coming out of undergrad in the summer of 2007). So, our first experience with retirement savings began right around the worst peak-to-trough decline in U.S. stock markets since the Great Depression. This tough initial experience with investing has left some young professionals favoring a more conservative investment allocation in their portfolio or with the tendency to hold an excess amount of cash reserves. We may have one client who is fully comfortable with a 100% equity allocation for their retirement accounts, while their spouse is terrified of market risks and wants to invest in fixed income at an early age. With long time horizons until retirement it is critical for young investors to be positioned for growth with a focus on a globally diversified equity allocation in their retirement accounts, and many times it takes work to counsel one or both spouses to buy into this strategy.
Volatility in financial markets serves as a reminder that risk is also everywhere in the investment world.
Read our post “Does The Stock Price Fully Reflect The News?” to learn our thoughts about stock price fluctuations. We believe the best way to protect yourself from financial risks is to construct a diversified portfolio with an asset allocation that fits you and then stick with it. Go about your daily life knowing that your investment assets can decline at any point due to reasons beyond your control, but also know that your investment allocation fits you and that over time it will help you meet your financial goals. The same goes for health risks: Go about your daily life knowing that your health may fail or your life end short, but also know that you have made preparations that will help care for your family in your absence. Read our post “Make A Wise Investment By Investing In Good Health” for more guidance.
Now let’s enjoy the ride every bit of the way while we still can!