By John R. Berry
Here at Corner Post Financial Planning, we want your financial plan to be resilient.
Paraphrasing the dictionary, a resilient financial plan would be able to recover from a shock, misfortune, or change. It would not fall apart.
With every financial plan, we conduct basic stress testing.
For example: What happens if…
- a) You spend $500 more each month?
- b) Returns are 1 percent lower?
- c) Inflation is a half-percent higher than expected
???????Plans that don’t pass these micro-stress tests aren’t resilient.
You should be very concerned–as we are!–if your financial plan involves too many things happening in just the right way.
For example: “We won’t run out of money as long as we average 6 percent returns with no bear markets and inflation is a flat 2.25 percent for the next 40 years. Also, neither one of us can die or get very sick.”
There needs to be more than one exit out of the maze.
Once we determine that your plan has some hardiness to it, we can look at more challenging situations that keep clients up at night.
These major financial whaps might be any of the following:
- Early death of a spouse
- Family member needs ongoing financial help
- Catastrophic health or long term care incident
- Major purchase you really regret
- Legal judgment
No one can withstand all calamities, but let’s consider just one major expense hitting a family.
Say our client is a married couple, both 60. Terry and Meg Washington’s kids are grown, and they have appropriate health and liability insurance coverages. Should one of them die, the other would not struggle with ordinary bills due to loss of Social Security or other income.
What worries Terry and Meg, though, is an expensive long-term care incident late in life impacting their finances and legacy. They are on the older side of when purchasing long term care insurance is recommended and have asked us about their options.
Here’s our basic analysis: A typical long term care incident happens in your mid-80s and lasts three years. Assuming a nursing home stay totals $300,000 for three years today, in 25 years the bill could approach $900,000. Ouch!
The Washingtons qualify for an insurance policy that’s $1,110 a month, or $330,000 over 25 years. But self-insuring may also be an option. Many people don’t want to pay a $1,000 monthly bill for decades for something they may never use.
As Meg and Terry’s advisors, we model what their assets could look like in 25 years.
After our analysis, we have good news to report. If either Meg or Terry (or both) had a costly health crisis in their mid-80s, there’s a good chance they could pay for it out of pocket. Remember that we’ve already tested their plan’s basic resilience.
We aren’t after foolproof–an unachievable standard anyway–just a reasonable probability that the client will have a legacy to leave if they experience an “average” calamity.
Our couple is in a good spot in that they can choose what makes them most comfortable: traditional insurance or self-insurance. In other cases, the calculus leads to a stronger recommendation in one direction or the other.
Each of us likely will be dealt many surprises over the next several decades. Building resilience into your financial plan–first by addressing basic solvency, then by strengthening your defenses–is no guarantee against hardship. However, it certainly gives you more options than you otherwise would have.
Certified Financial PlannerTM professional John R. Berry is owner of Corner Post Financial Planning.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through ICA Group Wealth Management LLC, a registered investment advisor. ICA Group Wealth Management LLC and Corner Post Financial Planning are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including loss of principal. No strategy assures success or protects against loss.