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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.
Jonathan, I have appreciated your work for many years, but never so much as now. I too am dealing with a recent cancer diagnosis (endometrial cancer, Stage 3A), and while I am fortunate to be in remission now, it turned so many things on a dime. It wasn’t long ago that I was staring out the window and wondering if all of the work I had done financially was not to secure my retirement that I might not see but to benefit my heirs (whom I love, but still…) which is to say, every day I am grateful to be here, I am also reminded that we do not know what the future holds. And regardless of whether I am able to enjoy my retirement or not, without the work I had done over decades, this last year and a half would have been more than unbearably hard – and it was hard enough. I have been fortunate to have lived a great life so far but my today self has been ever so grateful to my past self and the smart, but unsexy things that I did, to position us. Now for the harder work – living to enjoy it. All the best to you and many thanks.
So glad to hear you’re in remission. Do your best to enjoy every day you get!
Jonathan, I am a fan of you and your work… for many years. Thank You for being excellent! Chuck
Turning on a dime, huh? I know the feeling, Jonathan!
Like Jonathan, my forever plans went sideways when I was diagnosed in July 2022 with a similar type of lung cancer. “Similar” but not the exact same.
I’ll spare many of the details, but I ended up “winning the lung cancer lottery” by getting ALK Positive lung cancer. That’s what my doctor said to me when I was at my low point. She called to say my Next Generation Sequencing (NGS) genetic test from my biopsy came back and the news was great: A daily pill was available rather than traditional radiation and chemo. The drug is great, but they stop working after a few years. Thankfully, there are a few other drugs I should be able to take when Alecensa stops working.
Here’s my “Turn on a dime” timeline:
Me minding my own business at 56, with plans to retire between 60-62
Difficulty breathing so I go to the ER after repeated visits to my PCP (It’s asthma, etc)
Being told I have lung cancer
After CT scan, being told it’s stage 3b
After PET scan, being told it’s Stage 4b (that’s the final stage for ALK)
…and by the way, we found a 2nd cancer in your tonsil. That one is HPV cancer, stage 1, thank god.
Me looking at the avg lifespan for lung cancer: 1-2 years
Getting told what radiation treatment does to your mouth, teeth, neck, etc.
You can’t predict if you will have faulty genes like Jonathan and me. You can have a plan to deal with it.
My planning was not 100% complete, but I did enough when I was younger to be able to weather the storm.
Fyi: Someone with ALK Positive cancer has about a 6.5-7 year median lifespan.
Sorry to hear about your diagnosis. On the other hand, when I was told my lung cancer was caused by a defective gene, I was hoping for one of the “popular” ALK varieties, but no such luck. I have EGFR Exon 20, where the median life expectancy is 16 months.
https://www.janssenmedicalcloud.com/en-us/specialty/oncology/ex20ins/egfr-insertion-mutations/prognosis
Thank you, Jonathan. I appreciated your articles, they are my favorites, and you have inspired me to appreciate life more, especially the little things, like your coffee in the morning and watching the birds.
Jonathan, want to know that as a long time follower of yours, I always appreciate your wisdom and perspectives which have been very helpful. A heartfelt Thank You!
Excellent point about having mostly “liquid assets” after retirement. It makes a lot of sense. However, in 55+ communities I am familiar with, retirees over 75 are still owning multiple homes. Many are snow birds. Worse still, several over the age of 80 own a property or home abroad.
Yes sir,
The key word there is ‘OWN’ as in no mortgage to pay. In 2022 I bought a home in another state at age 71 and it will be paid for by June of 2030.
It’s in a trust and the trust is automatically making the payments and it will create ‘liquidness’ with rental money coming in and just taxes and insurance to worry about. So, I think it’s the structure of the ownership of some things that makes the grade a little better.
But, that’s my opinion, any others out there?
I, too, Jonathan underbought my house. And nearly 25 years—and several years paid off—later I am still living in it. Built in 1942, its a “Minimal Traditional” 2 BR, 1BA, just 900 sq ft. But it has a full basement, which I utilized as my work space for my side hustle for 15 years. With even my 15 year mortgage much lower than most of my peers 30 year versions I socked away the extra savings in my taxable brokerage account, leading to early financial independence.
I retired 2 1/2 years ago. Looking back, staying out of debt, even when I was younger, was one of the best things I ever did. There’s interest and dividend compounding, but I’ve never heard anyone talk about “staying out of debt” compounding.
I don’t think people realize how much debt can cost over the years. For instance, for a 15 year fixed home loan, you end up paying about twice the amount of the loan back. For a 30, it’s three times. Debt interest over the years can kill you and severely limit your funds for investing and a good retirement.
Thank you, Tim, for these good reminders. I definitely enjoy the articles but I get a lot of good and valuable information from the comments as well.
Jonathan,
I very much appreciate your writing and what you’ve created with this website. I especially like your use of the word “resilience.” I call it “sleep good” money. The market can go down 1000 points in a day and it’s more of an opportunity than a problem. Thank you for your generosity with your insights, – Dave Baese
I was influenced by my upbringing. My father ran an insurance company which had to invest conservatively. Mom was exactly the opposite. The worse the market got, the more she invested. I hope I lean more toward her philosophy. My small investment in Berkshire Hathaway is kind of a cash play. This recent headline caught my eye, “Buffett’s Berkshire currently holding more short-term US Treasury bills than the Federal Reserve.”
I’m retired and doing a little “reverse dollar cost averaging.” During this great run up we’ve had, I’ve been taking money out of the market monthly. I’m not sure Mom would approve.
“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”.
This sentence caused a chuckle. You have described my brother perfectly. I call him a “white knuckle investor”.
Thanks for this great reminder that things can change rapidly. My mom went from an able bodied 76-year old to having no control of the left side of her body in a matter of months due to a rapidly growing brain tumor. We had to quickly adapt a 1965 colonial for modern ADA accommodations, as well as update wills, POAs, and organize her finances. It was a stark message that life can change in a blink.
“What if I live longer than I expect and need to dip more heavily into my portfolio?”
We’re all hoping that you will have to dig really deep into your portfolio Jonathan!
Keeping fixed costs low has always been a priority for me. Especially regarding vehicles! I’ve never fell for the advertising that “your car is a reflection of you”. Baloney!!!! I’ve always bought new because I’m no good at fixing vehicles. And I keep them a long, long time. The last time I bought a new Corolla and the salesman was taking my information for financing options, he asked for my income. I told him. His response was “are you sure you wouldn’t rather have a Highlander or a Sequoia? You would qualify for one.” I said “yes, I’m sure the Corolla will be just fine. I’ve had 3 of them and this will be the 4th one.” I’m especially happy with the Corolla when I fill up at the gas pump. I see the total on the pump for a big SUV that just pulled away and his total was well over $100. Even when gasoline is near $4 a gallon I rarely go over $50 for a fill-up.
Flexibility is why I have a car. I take public transportation to work, but my wife and I each have our own car. On weekends and occasional evenings, it’s convenient to have my own car. We never fight about who can have the car when, we don’t have to ask each other for rides, and I don’t have to deal with Uber. I know we could save money without it, but this is what having $ is for.
Are you sure you didn’t just confirm that your car is a reflection of you?
I dislike driving Chris’s 2010 Prius. It’s slow, noisy, rattles, and doesn’t handle particularly well, but it’s damn reliable and I love the $25 fill-ups!
I never bought smaller vehicles than a Camry or Accord. For over 20 years I have owned minivans or 3 row SUV.
The reason is safety of course.
Both Highlander and Sienna hybrid do around 35 MPG.
I used to have a good friend who owned small car and I refused to drive with him. If he owned the above vehicles he would be alive. It’s just physics.
A bigger vehicle is just a cheap insurance but even more. It’s bigger, the ride is smoother, quieter and more comfortable.
This is why I have money.
Yes. It’s mass times velocity equals mass times velocity. The larger the car, the bigger that mass.
That’s why we drive our Ford Expedition. It’s a 6,000 lb tank, and if we get hit in an accident, we’ll be shaken up a bit, but able to walk away. Like you said–it’s cheap life insurance. We’ll pay $300+ more in gas each year, but it’s worth it!!
I have spent some time driving 18 wheelers and just used to shake my head in disbelief when passed by a Smart Car. Seemed like golf cart VS Godzilla.
A big belief in flexibility is what keeps our stock allocation lower than it historically has been. As I’ve written about separately, one of the curious things about being nomadic is the inability to just “go home” when misfortune of whatever kind strikes. To guard against that, we want to be able to access funds for a sudden large expenditure or suddenly increased monthly outlay for whatever reason.
Also, we want to flexible for unexpected good fortune. If we stumble on a place we fall in love with and want to stay, we want to be able to do so without undue concern about having just entered a bear market and most of our assets being down.
Sometimes I think our stock allocation should be even lower. Could we be making more with a higher stock allocation? Probably but the flexibility has its own value.
Flexibility is also built into our plan. Our stock allocation is fairly high, but there are a number of reasons for us to have more in stocks—I still like my stable job, we’re both healthy, no expectations to quickly need a lot of cash.
But there are many future unknowns, as Jonathan points out. There’s been much written about the comfort of cash—including by me—but it’s really about feeling of flexibility. Yes, cash is ravaged during times like we’ve just been through, but that’s what the whole portfolio is for. A balance must be struck.