Ready for the “what-ifs” of life?

If you’re in the middle stages of your career and also busy with family responsibilities, you’re taking care of a lot of things today. But what about tomorrow? Some unexpected future events could upset your progress toward your financial goals. What are these events? And how can you prepare for them?

Generally speaking, these events fall into the following categories, covering both financial and personal issues:

Financial emergencies

If you were faced with a large, unexpected expense, such as a major home repair, or you encountered a gap in employment, would you be financially prepared? If you weren’t, you might be forced to dip into your long-term investments, thereby affecting your financial future. In addition to taxes and penalties resulting from the sale of these investments, you may also be faced with selling them when their value is down.

To help prevent this scenario or to avoid taking on high-rate debt, you should build an emergency fund containing three to six months’ worth of living expenses, with the money kept in a liquid, low-risk account. Some possibilities for your emergency fund include savings and money market accounts. Importantly, you’ll want to make sure that your emergency fund is separate from any account you use for your everyday expenses. To supplement your emergency fund, you might also consider opening a personal or home equity line of credit. You’ll want to only use a credit line if absolutely necessary, but it may be a better option than taking out other types of loans.

While having the three to six months’ cash cushion can help you stay on track toward your goals should the unexpected happen, holding too much cash can detract from your ability to fund your long-term investments, which are needed to help you achieve a comfortable retirement, along with other objectives. Also, in an inflationary environment, holding too much cash leaves you susceptible to a greater loss of purchasing power as compared to putting money away into growth-oriented investments.

Market volatility

Actually, market volatility probably should not be considered an “unexpected” event because it’s a normal part of investing. Because you’ve already been an investor for a while, you know that the financial markets will always go through ups and downs. Still, the downturns, while not necessarily unexpected, can be unsettling. However, you can take steps to prepare for them:

• Review your goals. It can be tempting to view your investment success only through the lens of recent market results — but this can lead to overreactions and unwise decisions. Look at the overall progress of your portfolio to determine if you’re still on track toward your goals. If you are, you may not need to make any changes.
• Review your risk tolerance. If you find yourself getting unusually upset over market downturns, your tolerance for risk may not be as great as you thought. Investing always involves risk, but if you’re feeling that you simply are taking on too much of it, you may need to adjust your portfolio. But it’s also important to keep your emotions from guiding all your investment decisions, as overemotional investing can lead to negative behaviors, such as constantly moving in and out of the market.
• Rebalance your portfolio as needed. Over time, and sometimes without you doing anything, your investment mix can become unbalanced in some ways. For example, the growth-oriented investments in your portfolio may have gained so much in value over the years that they now take up a larger percentage of your holdings than you originally intended, with an accompanying increase in risk exposure. Conversely, you may have gradually added a heavier presence of cash and fixed-income investments, to the point that your portfolio has lost some of the growth potential it needs to help you reach your retirement goals. In either of these cases, you may need to rebalance your portfolio to bring it back to the desired asset allocation that’s aligned with your risk tolerance.
• Focus on the long term. If you have many years to go until you retire, time is really on your side as an investor. Unlike those who are already retired, you likely don’t need to sell investments to pay for your living expenses, so you can overlook the inevitable downturns in the financial markets, harsh though they may seem at the time. Your best move is to focus on your long-term goals and follow a strategy designed to meet those goals. Remember, a short-term market decline doesn’t change your long-term goals.

Inflation

For many years, inflation was quite tame. But it reached a 40-year high in 2022, and though it may subside somewhat in 2023, it’s still an issue of which you should be cognizant. In particular, inflation may affect your ability to save, which is why it’s important to revisit your budget in inflationary periods to see if you can find adjustments that can free up money for your savings and investments. And your financial advisor can illustrate various scenarios that can give you some flexibility in accommodating inflation in your financial strategy. For example, these illustrations can show the impact of saving less today but more in the future, or how changes in your retirement goals, in regard to timing and the amount of money you’ll need, can affect your saving and investment moves.

Health concerns

A serious illness or injury could cause you to miss significant amounts of work. If this happens, how could you make up for the lost income? Your employer may offer a short-term disability plan, but it might be inadequate in terms of duration and amount of coverage, so you may want to consider adding a long-term disability policy. Ideally, you’d like to replace as much of your after-tax income as possible.

Your family’s future

If you unexpectedly passed away, what impact would it have on your family members? Could they stay in the same house? What about your child’s education expenses? Of course, no one can predict the future, which is why it is so important to maintain adequate life insurance. Your employer may offer a group policy, which can be helpful, but it might not be sufficient. The amount and type of coverage you need depends on a variety of factors, including your age, liabilities, income, final expenses, children’s education and other goals. Making sure you have enough coverage is probably the single most important thing you can do to protect your family.

You don’t have to prepare alone

Your financial advisor can help you create a comprehensive strategy that can prepare you for many of the “what-ifs” in the future, whether they relate to your investment or protection needs. Life is full of possible surprises, but when you’ve got the right guidance and assistance, you can be ready for just about anything.