1st Responders

Summer of 2018 has been punctuated by natural catastrophes.  Fires, volcanoes, and hurricanes have held the headlines.   In our Colorado valley, we were profoundly impacted by the Lake Christine Fire.

We are so grateful for the 1st responders and support teams that descended on our community to contain it and deal with the resulting problems.   These people were trained, prepared and put into place to respond to an imminently dire situation.

What forthcoming financial shocks will you face in your fall season of life? There are three primary life jolts to anticipate and potential financial first responders to assist you.  Financial first responders include economic assets, risk transference tools, family members, trusted advisors, friends and your extended community. The idea behind these first responders is that you know what or who they are ahead of time and they are positioned to respond efficiently and effectively.

Financial shock of losing a spouse.  If you are concerned about a drop of income for a surviving spouse, consider these four first responders to optimize and utilize:

• Discern how to maximize Social Security BEFORE YOU TAKE IT. The best way to increase survivors’ benefits and hedge against longevity is to have the highest earning spouse delay taking their benefit until age 70.  The surviving spouse will then receive benefits based on the highest benefit available.
• Maintain Life Insurance. What the widow or widower’s cash flow needs?  To avoid an immediate lifestyle shock, a permanent, cash value policy may facilitate this need.  Review your need for insurance annually and make sure you have the right fit for your needs.
• With a pension, or an annuity, discern your distributions with “worse case” in mind. Your options will vary based on contract, but usually include life only, period certain, or joint life.  Carefully consider the implications for your needs today and what would be needed if the recipient spouse was gone.  Discuss options in context with your other financial assets and lifespan considerations
• Converse with family members. Discuss your needs and desires.  What would happen in the event that your spouse was not sitting at the breakfast table today?

Would you want to live with adult children?  Have the conversations and play out the financial implications.

Medical expense shocks.  Over time, health care expenses will increase at a higher rate than other living expenses. I use an inflation factor of 6% for health care versus 3% for other living expenses.  In retirement, the biggest health care shocks are experienced by people facing costs associated with long term care that are not covered by Medicare. Two preparation ideas for addressing health care shocks are:

• Discuss desires and funding options early. Do you want to pay for these costs with available assets or transfer the cost with an insurance product?  What are the benefits or challenges inherent in each?  Define what assets do you have to pay for these expenses.  How liquid are they?  If you want to transfer risk, the earlier you look at LTC policies or hybrid insurance products, the more options you will have.
• Invest in a Health Savings Account before you retire. If you participate in a high deductible health plan and are not receiving Medicare, you can invest with pre-tax dollars, and withdraw money down the road in retirement tax free to cover qualified expenses. There is also no taxation on the growth inside the H S A.  Triple tax benefits!

Recession shock– Given the growing reliance on personal savings for retirement income, a downturn in the market can diminish the ability to sustain a systematic drawdown rate.

• A prudent 1^st responder to have in place is cash or cash equivalents. Look at what you need to supplement your SS, pension or annuity income and maintain 18 months of a cash cushion inside your retirement plans, or sitting in laddered CD’s or savings accounts.  When we enter into another economic winter, you will have cash to access and be able to allow your portfolio or other investment assets time to recover.

 

We don’t know when they will occur, but financial shocks are inevitable.  Having your first responders in place doesn’t mean you won’t experience hardship, but you will be more resilient and likely to cope in your financial integrity. Plan now.  Position the proper tools, incorporate the techniques and envision the attitudes that will give you peace of mind as you mitigate financial disasters.