Comprehensive financial planning is an activity in which only a minority of the population engages. It’s been that way for as long as I can remember. As you might suspect, I’m quite irritated by that reality. But we don’t get paid to tilt at windmills around here, so I can accept that it is how it is.
Perhaps the biggest reason that people don’t do it is because they think it’s messy. And it sort of is. There’s a lot to think about and analyze and decide on to really do it as well as it can be done.
Yet, as is the case with a lot of things, the bulk of the job is a lot easier to do than the fine-tuning which follows. I would argue that something is better than nothing in this area. So while I may not be willing to mount up and tackle the whole windmill, let me take just a second to show you how easy the first pass really is.
You can think of it in terms of these three questions:
1. Are you nearing or already in retirement? This matters because it probably defines when new savings will stop and the draw down of existing savings will begin. At this point the consideration of risk should also change. When the prospects for replacing investment capital drop off (i.e. no more pay check), it becomes that much more important to protect what you have. Shifting capital away from higher risk assets at this point is prudent, and maybe even vital depending on how much excess savings you have. If you aren’t way over funded, a single hiccup could knock long-term income irrevocably off course.
2. Have you accumulated what you need to live on? That’s the previous comment about being over funded, revisited. So, do you? If you do then you get some peace of mind and some guidance on what you should avoid when making future investment decisions. If the prospect of having to make the money a second time is unappealing, then you have to switch allocations to try to make a loss improbable or even impossible (asteroid strikes and zombie uprisings excepted…). If , on the other hand, you don’t have all you need, then you need to focus on how to react to that knowledge. Work longer? Adjust budget expectations? Rebalance the portfolio? You can’t know the future, but that doesn’t mean that you can’t gauge what’s likely or unlikely. If you know you’ve won the game, protect the win. And if you haven’t, use the time left on the clock to make adjustments.
3. Do you need guarantees? Are you going to be able to sleep at night knowing you have risk exposure still out there, or do you want someone to insure that you can’t lose what you’ve saved? If you do, the insurance industry is the place you need to look for financial products. Why? Because in the US it’s illegal for securities (such as stocks, bonds and mutual funds) to be guaranteed. They may be backed by assets, but that’s not the same as being guaranteed. Only banks and insurance companies can make financial guarantees. The insurance industry has done a very good job of taking advantage of this distinction and designing savings products for those who want to know the capital is protected.