No Surpises: How to Plan for Financial Uncertainty
January 1, 2014 | Your Finances
Uncertainty – it can present challenges and opportunities and set your mind swirling with possibilities and unknowns. Whether it relates to your job, personal life or the larger economy, uncertainty often has financial consequences. How can you manage what you can't predict? Start with a financial plan.
Take Action to Be Ready for Opportunity
Life’s surprises can bring joyous celebration or test your crisis management skills. If you’re inclined to worry about the future, uncertainty about finances may leave you feeling anxious. The good news is that if you take positive steps to put yourself in the best possible financial position, you’ll be ready to manage whatever life presents.
A comprehensive financial plan prepares you for the risks you could face and puts you in a strong position to confidently seize opportunities that may arise. Your plan starts from where you are today and provides a road map for meeting short-term and long-term goals. Following a plan helps you build a strong foundation for good decisions at all stages of life. Here are some examples of what your plan might include:
- Starting Your Career. Early in your adult life and career, it’s important to establish a habit of saving and systematically paying down debt from student loans or credit cards. Appropriate goals include establishing an emergency fund to fall back on if you need it and starting retirement savings. Take advantage of employer-sponsored opportunities such as payroll-deduction plans and matching retirement contributions. Look into purchasing disability insurance to protect yourself against the risk of lost income, as well as property and casualty insurance to protect your belongings. Consider buying permanent life insurance while you are young and healthy to protect your insurability and begin building cash value that will multiply over time.
- Becoming a Couple. You’ll want to start your life together on good financial footing by establishing a family budget and a financial plan for the long term. This includes creating an investment strategy with the right combination of investments to suit your goals and time horizon. A financial representative can create a customized plan based on your needs and help select the right financial options for you. You’ll also need to update insurance protection and beneficiary designations for both of you, and if you haven’t already done so, see an attorney to document your wishes for important items, including wills, financial powers of attorney and healthcare directives.
- Building a Family. It’s good to keep a close eye on finances during this time of your life, as your priorities can expand to include education savings, increased emergency funds and insurance protection. As your family grows, so do expenses ranging from child care or music lessons to sports participation, competitions and other educational opportunities. Amid the balancing act, it’s a good time to expand your retirement savings to stay on track for your future. You also may want to talk to your attorney or financial representative about how a trust might be a useful part of your financial security plan.
- Approaching Retirement. Within 10 or 15 years of retirement, take the time to ensure your retirement plans are on track. This could include taking care of any remaining debt, updating your investment asset allocation, and considering Roth IRA and 401(k) options to address future inflation and income taxes. Consider maximizing retirement contributions and, if you’re 50 or older, take advantage of the catch-up provision that allows you to increase IRA and 401(k) contributions. Create an estate plan if you don’t have one, and talk to a financial representative about a retirement income strategy that will use your funds most effectively. This may include decisions on whether to pay off a home mortgage or how to cover health and long-term care expenses should they arise.
- Retired. Whether you choose to spend your time pursuing a favorite hobby, volunteering or working part-time, in retirement you’ll likely begin withdrawing the funds you’ve saved. Your retirement income strategy should include multiple income streams to pay for essential and discretionary expenses, including options such as annuities to provide lifetime income. At this stage, you may want to contribute to education savings or buy permanent life insurance for grandchildren, and consider tax strategies as part of your estate plan. It’s also an important time to consider the legacy you want to leave and how to protect survivors in the event of your death.
Though you never know what life will bring, you still can be ready for what lies ahead. Wherever you are in life, having a strong financial foundation offers peace of mind and confidence to make good decisions when needs arise. A financial professional can help you create and implement a financial plan to build that foundation and be prepared for the future.