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WE MAKE FOREVER PLANS—and often end up shredding them in a few short days.
Think of the folks who hike their portfolio’s allocation to stocks, only to turn tail when the next market downdraft reminds them of their true risk tolerance. Or the families who are forced to move because of a job change, or the arrival of children, or the need to help aging parents. Or me, who thought he might have 30 more years, but instead may have just one.
It’s important to be financially resilient, able to stand our ground in the face of market turmoil, big medical bills, layoffs and more. This, of course, is the reason for ample savings and a variety of insurance policies. But in addition to this financial resilience, it’s also crucial to have financial flexibility, in case we need to tear up those forever plans. What does that mean in practice?
First, we should favor assets that are easily sold, or “liquid” in Wall Street speak. This is a reason to avoid things like private partnerships, second homes, rental real estate, car leases and cash-value life insurance, where selling can be slow and exiting can be costly. Last year, Elaine and I twice found ourselves intrigued by the idea of a second home. Thank goodness that never went beyond daydreaming, given my recent diagnosis.
Second, we should have at least some money in a regular taxable account, rather than stashing everything in retirement accounts, where early withdrawals can mean tax penalties. That said, between 401(k) loans, the ability to withdraw Roth IRA contributions at any time, and the many exceptions to the 10% early withdrawal penalty, retirement accounts are increasingly a low-commitment proposition.
Third, we might earmark part of our regular taxable account for financial emergencies and then stash that money in conservative investments, though—to be honest—I’ve never had a separate emergency fund. Early on, when I was a lowly reporter with a graduate-student wife and two young children, setting aside three-to-six months of living expenses for financial emergencies seemed far beyond what I could possibly afford. I eventually amassed a decent sum in my taxable account, but I viewed that money as part of my long-term investment portfolio—money which, in a pinch, I could always dip into to pay unexpected expenses.
Fourth, we should aim to keep our fixed living costs low. This is a notion I regularly mention: The lower our fixed living costs—think mortgage or rent, utilities, groceries, property taxes and insurance premiums—the more money we’ll have available each month for savings and for discretionary “fun” expenses. Equally important, we’ll be better able to cope financially with unexpected life events. Indeed, I believe perhaps the biggest contributor to my financial success was living for two decades in a house that was far less expensive than I could afford, thus freeing up ample sums each month for savings.
Fifth, we should ask whether we’re betting too heavily on a future that may not happen. For instance, do we keep much or all of our portfolio in the stock market, ignoring the risk—however small—that a surprise need for cash could coincide with a brutal bear market? In the name of caution, perhaps we ought to keep a little more in bonds or cash investments, or maybe set up a home-equity line of credit as a backup source of cash.
Finally—and despite that last suggestion—we should be leery of leverage. Have we bought an overly large home or a vacation property, assuming the big mortgage involved will be easily handled because our job is safe? What if we’re wrong about our job? Such things would reduce our financial flexibility and could put our financial resilience at risk.
So, has my diagnosis prompted me to tear up my forever plans? Yes and no. As I discussed a few weeks ago, I’ve recently taken countless small financial steps, though most of them are designed to make things easier for my heirs. Meanwhile, for now, the big stuff remains the same. I have no intention of unloading my house, and I’ve yet to make any changes to my portfolio’s asset allocation.
Perhaps such steps would be necessary if I didn’t have health insurance or I wasn’t still earning enough to cover the bills. What if I live longer than I expect and need to dip more heavily into my portfolio? Fingers crossed, I already have enough in bonds to cover a few years of expenses—and those bonds take the form of easily sold mutual funds.
Jonathan Clements is the founder and editor of HumbleDollar. Follow him on X @ClementsMoney and on Facebook, and check out his earlier articles.
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Exceptional and so objective again…..as I have enjoyed your thoughts for decades now.
Having said that, I went the “second home” route last week……..and you made me think some more!!!.
Jonathan:
As usual…a stellar article.
I am on board with you in all but your negative comment regarding “cash value life insurance.” I won’t go into it here, but after 50 plus years of being in financial services, suffice it to say I have rarely lost an “argument” with anti cash value insurance folks, mainly because 99% of them speak from a position of ignorance concerning the product. It is not appropriate for everyone, but where it is appropriate, nothing can match its benefits.
I recently finished implementing my retirement income plan. Using a very generous Social Security Benefit as our base, I added two income annuities and a 3% withdrawal strategy, using the Vanguard Dynamic pending Strategy, and I have basically constructed a 6 figure, inflation protected, extremely tax efficient retirement income plan.
What I like about it most is it is on auto pilot. My Vanguard Check is direct deposited on the 1st of the month, followed by the annuity checks being direct deposited on the 7th of the month, and our Social Security being deposited on the 2nd Wednesday of every month, (although it actually hits the bank on the Monday prior, because of the bank I use.). This means that in the event of experiencing cognitive impairment later on, the checks will keep coming.
As you suggested, I have my investments in Taxable brokerage account, Deferred Accounts (Tax Deferred IRA) and Tax Fee Accounts. (Roth IRAs and Roth funded Income Annuities.)
Having NO debts and no Mortgage Payments, I am also on board with you here.
As a protection against market declines, we have 2 years and 8 months of cash on hand, to protect against having to take withdrawals from investments in a down market.
My bride and I have Great Medicare Supplement Policies and we are both in Good (me) and Fair( her) health. I go to my PCP quarterly and have my bloodwork done quarterly. I have no serious health issues currently, and I am damned sure never going to put myself in the position to hear, “If you had only come in sooner.” Unfortunately, my bride is not as fastidious abut her regular doctor visits, but I “encourage” her as much as I am able.
All of your recommendations in this article are spot on and I appreciate the effort you took to create it.