While you're working hard to achieve your long-term financial goals, you may encounter some bumps along the way. One solution is to put strategies in place to help you protect the most important things in your life.
Two types of risks
Risks usually fall into two main categories:
- Those that all of us should prepare for regardless of where we are in life.
- Those that depend on your individual goals – these will change as you go through life
If you're a young adult, you may have a spouse or young children who depend on you to provide for them. As you grow older and approach retirement, your focus may begin to shift to protecting the financial security you've created for yourself and your family. And even later in life, your goal may be to pass on a financial legacy.
1. Universal risks
- It's important to prepare for certain risks that could affect your future goals. You can address unexpected expenses or events by setting aside emergency savings and maintaining access to a personal line of credit, if needed. For example, we generally recommend an emergency fund that can cover about 3 to 6 months' worth of living expenses.
- Property loss or liability – which you can cover through homeowners, renters or auto insurance coverage, and even umbrella liability coverage.
- Investment risk and market volatility – although diversification cannot guarantee a profit or protect against loss in declining markets, a portfolio that's properly diversified with quality investments can help you better weather market ups and downs.
While market volatility attracts a lot of attention, your emotions, and your reaction to these declines, could be the biggest risk to your investment strategy. One way to counter this is to talk with your financial advisor about how much risk you're willing and able to take with your investment strategy, so you can be better prepared to stay on track during the inevitable short-term declines.
- Medical expenses – since large medical expenses can pose substantial risks to your financial situation, make sure you always carry some form of health insurance while you're working and during the years before you become eligible for Medicare.
2. Goals tied to life stage
Earlier in life
You might not have a lot of money to spare. Your goal is typically to ensure your family has enough money to provide for their needs should something happen to you, as well as ensure your family's long-term goals are protected, even if the unexpected occurs. Insurance is designed to help address these risks by providing protection for what is too expensive to replace on your own. Your financial advisor can help you determine the right type and amount of life and disability insurance based on your specific situation.
Moving toward retirement
Your focus may begin to shift from providing for your family's needs to protecting the financial security you have created – ensuring it lasts throughout your retirement. Since your assets need to provide income for as long as you live, one risk is actually living longer than you expect. Sticking to a sustainable withdrawal rate strategy, such as an initial withdrawal rate of 4%, can help you cover your expenses during early retirement, while helping ensure you still have money for your expenses well into the future.
In addition to a reasonable withdrawal rate, you may want to consider the importance of lifetime income. Edward Jones believes that the foundation of your retirement income strategy should be built with lifetime income sources, such as Social Security or a pension. Since certain annuities can offer payments for life, they may help fortify this foundation by providing "income insurance" – a lifetime payment stream regardless of market performance or how long you live. However, there are important trade-offs with annuities, so you and your financial advisor can determine whether annuities make sense for your retirement strategy.
The second major risk you could face is that of needing costly long-term care. Even if you don't anticipate needing nursing home care, you should still plan for some type of assisted living or home health care costs within your retirement strategy. You can plan to pay these costs out of pocket or insure against them.
Your financial legacy
There are many moving parts to your estate strategy, and one of the biggest risks is that your documents may not reflect your strategies. Many times, people forget to update legal documents or beneficiary designations after a life event, such as a marriage or the birth of a grandchild. Work with your financial advisor and team of legal and tax professionals to make sure your documents, beneficiary designations and asset registrations are aligned with your estate goals.
Ultimately, it's important to understand that your financial strategy is not complete until it has some protection from the unexpected. The good news is that, while the risks may change as you go through your life, you can prepare for them. And you don't have to do it alone. Your financial advisor understands what's important to you and can partner with you throughout your life to help you and your family prepare for the unexpected.
Scott Thoma co-chairs Edward Jones’ Investment Policy Committee and is responsible for Client Needs Research, the team that develops and communicates advice and guidance for client needs, including retirement, education, preparing for the unexpected and leaving a legacy.
He is a CFA® charterholder and a member of the CFA Institute and the CFA Society of St. Louis. Scott also earned the CFP® professional designation. He graduated summa cum laude from Southern Illinois University-Edwardsville with a bachelor’s degree in business administration, with an emphasis in finance. Scott earned a master’s degree in economics and finance from the same university.
This information is for educational and illustrative purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.
Edward Jones does not offer homeowners insurance, renters insurance, auto insurance, umbrella liability coverage or health insurance.
Edward Jones is a licensed insurance producer in all states and Washington, D.C., through Edward D. Jones & Co., L.P., and in California, New Mexico and Massachusetts through Edward Jones Insurance Agency of California, L.L.C.; Edward Jones Insurance Agency of New Mexico, L.L.C.; and Edward Jones Insurance Agency of Massachusetts, L.L.C.
Annuities can be a key part of your overall retirement strategy – but they’re not right for everyone. An annuity is an insurance contract issued by an insurance company. The annuity contract has two phases: an accumulation phase and a distribution phase. During the accumulation phase, the contract owner makes a payment or payments into the contract in exchange for either a fixed or a variable rate of return that is not subject to income taxes until withdrawal, permitting the tax-deferred growth of the investment. During the distribution phase, the accumulated value of the annuity contract can be converted into a guaranteed income stream that can last for life or for a set period of time. Before investing you should carefully consider the investment objective, risks, and charges and expenses. Withdrawals taken prior to age 59½ may be subject to a 10% federal tax penalty.
Annuity guarantees are subject to the claims-paying ability of the issuing company.