Because You Asked: How Do You Plan for the Unexpected?

I am by profession a planner, specifically a CERTIFIED FINANCIAL PLANNER™.  The planning mindset comes naturally to me, as I try to incorporate planning in all areas of my life. I love day planners, calendars, notebooks, reminders, etc.  I have spent most of the last year planning an upcoming trip to Paris in December, which is another type of planning that I do for fun.  From a psychological perspective, it may be that it feeds an illusion of “control” over life.  Ha ha.  Because the reality is that however much we plan, there will always be situations and circumstances that we cannot predict or control, life’s curve balls, that everyone encounters at some point.  In our work we like to say, “Pray for the best, but prepare for the worst.”

So how do you go about preparing for the worst?  There are a few concrete ideas I will share that we think help to insulate you, at least a little bit from the unexpected.

  1. Make sure that you have “emergency savings” readily available for your needs.  When we talk about this, everyone wants to know: How much?  The amount will vary from household to household, but generally, anywhere between three- and six-month’s worth of your regular household expenses.  This will help cover the issues like car repairs, minor accidents, water heaters and other things that happen occasionally.  These funds should generally be held in a separate checking or savings accounts that you have designated for short term emergencies. Once you dip into the fund, you should work to replenish it as soon as possible.
  2. Make sure that you have enough liquidity in your investment portfolio. This is an area that we spend a lot of time discussing with our clients.  By using the term “liquidity”, what we mean is that your investments are such that you could sell or liquidate them and access the cash in a relatively short period of time, meaning a few days.  This includes stocks, ETF’s, Treasuries and CD’s.  While CD’s that are cashed out early may result in a loss of interest, the amount is usually so nominal as to be irrelevant.

 Assets that are NOT liquid, or easily converted to cash include:

    • Real estate and other Real Estate investments such as REITs (Real Estate Investment Trusts)
    • Some Bonds or debt instruments that will only be paid over a period of time
    • Many Annuities and other insurance products: it depends upon the type of annuity or insurance and how long you have owned it, but most will incur “surrender penalties” which are charges that will be withheld by the insurance company, subtracted from your original premium if you liquidate the policy within the first few years.  Some even have surrender charges for up to ten years after the policy was purchased.
    • Some hedge funds and other private investments
    • Collectibles, art, cars, antiques

There is nothing wrong with incorporating some of these “illiquid” assets into your overall portfolio, and doing so can help you achieve greater diversification and reach your long-term goals.  You simply need to ensure that you have sufficient “liquid” assets to help cover unexpected expenses that may arise before locking up large sums in those illiquid options.

3.  Speaking of insurance…make sure you are covered! This is one of the key components for any household in preparing for the unexpected.  What type of insurance do you need? That is a big question, and we encourage you to talk with your insurance broker about your individual situation, but here are some minimum recommendations for everyone to consider:

    • Health insurance: this is an area that generates a great deal of discussion, but the bottom line is everyone needs some type of health insurance.
    • Disability insurance: this can be a critical component of family well being.
    • Life Insurance: while we generally don’t recommend whole life policies for most individuals and don’t view insurance as an “investment”, we certainly believe that everyone should have some type of coverage. At minimum you should at least have term policies that will enable your survivors to… survive, and fulfill their goals and dreams even if you are not with them, at least until you are at or close to retirement age.
    • Property and Casualty: Homeowners or renters Insurance, auto insurance, etc. Be sure to ask your property and casualty broker to review your assets with you every few years.  Once you have accumulated significant assets, we typically recommend that clients also consider an “Umbrella” policy to help provide additional coverage & prevent personal losses.
    • Business owners’ policies: dependent upon your type of business, you not only need to insure for operations and equipment, but potential liability and these days, cybersecurity insurance against losses like data breaches.
    • Travel Insurance: This is a type of insurance that many travelers don’t consider, often thinking: “Well I already have health insurance and life insurance, so that should be enough.” It really isn’t.  In my first paragraph, I mentioned that I really enjoy travel planning, and have a trip scheduled to Paris this December that I have been planning for the past year.  Just last week I learned that all of the local transportation unions in Paris have called for a strike beginning December 5th, and continuing indefinitely through Christmas!  There is even the possibility that the airport ground crews will strike as well, causing flight cancellations.  Will I be affected?  It is wait and see at this point, but if the “worst” happens, and the trip gets cancelled, I have travel insurance that will cover all the costs that might not be refunded, that I have already paid in preparation for the trip.

4.  Review and Update Beneficiaries, Wills, Powers of Attorney documents, and other Estate Planning instruments. We have written about these in previous blogs, but generally make sure that you have completed all of these, regardless of your age, and review them at least every five years, or for any change of circumstances, such as weddings, births, deaths and divorces.

5.  Other thoughts: Other thoughts related to “preparing for the worst” involve communication: make sure that someone knows where all of your important information is located, and that they have access to these things:

    • Passwords
    • Safes and safety deposit boxes
    • Insurance contracts & policies, bank statements, brokerage statements, etc.
    • Important contact information in case of emergency

Taking the time to think through and then communicate with your family members or close friends about your important information will take some of the stress out of dealing with emergencies and other unplanned life events.  Ask yourself the question: “What would I or my family do if ____________ happened?” and fill in the blank with the various crazy things that have happened to people you know.  At least think through the possibilities and figure out what professionals you need to engage to prepare yourself and your family for the unexpected.  These are some of our recommendations on how to “Prepare for the Worst.”

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