When I heard that there was a chance of rain this week in Southern California, I didn’t bet any money on the fact that it would happen. But I did do what I needed to: I pulled in my cushions from the patio and set my potted plants out from under the eaves ‘just in case.’ I suppose all that planning comes from my east coast upbringing. Where I grew up, we always expected a change in weather, and we never made plans without a backup. That was true for weddings, picnics, and even a short drive out to dinner. Yes, you could plan your day and hope for the best, but you always (always!) had a contingency plan.
When it comes to your finances, I recommend a good old, Easterner approach to planning. Why? Because even the best laid plans can go awry. Life happens, which means everyone needs a contingency plan.
Over the past week, I’ve been focused on income planning for two of our clients who are just entering retirement. It’s a deep-dive exercise in preparing for almost any possible scenario. We began, of course, with the basics: looking at their current assets, as well as their goals, values, and retirement dreams. Next, we built a plan that should fulfill their expectations. If they spend at the assumed rate. If the market remains at least somewhat reliable in its behavior. And if they live to be 100—no more and no less.
But we didn’t stop there.
I’ve always loved the Eisenhower quote about planning for battle: “Plans are useless, but planning is indispensable.” He knew first-hand that it is impossible to plan for an emergency on the battlefield because, by definition, an “emergency” is something that it is unexpected and certainly not going according to plan. My take on his wisdom is this: smart planning is what gives you the power to be flexible and adapt to stress when life doesn’t go according to plan.
So how do we plan for the unexpected? We shoot holes—lots of them—in every plan to see how it holds up. To do that, we look at the many stressors that could throw your plan off track. What if you or your spouse dies tomorrow? What if you need long-term care, and for how long? What if interest rates go through the roof, the stock market drops, or inflation escalates? And what if all of those things happen at once? Working from the best-case scenario, we look at the worst-case circumstances, and we create a plan that has the highest possible chance of succeeding—no matter what life throws your way.
What’s powerful about this approach is that it helps your plan build muscle. Pushing the boundaries helps us see what we can change to protect against stressors. The planning process also helps you understand which risks are worth taking—and which aren’t. Let’s say you’re already retired, and you have a large percentage of your portfolio invested in equities. That might be fine if you’re collecting a decent Social Security income, your house is paid off, and you have a good pension coming in.
But what if you don’t? What if you’re still paying a hefty mortgage, your Social Security income is minimal, and your only additional income is coming from your IRA? In that case, a significant market correction could create a major decline in your income so that overweighting equities could be devastating. Planning helps you understand risks, as well as the tradeoffs you may need to make if the unexpected occurs.
I’m a perfect example of someone who experienced a confluence of unexpected plot twists in life. My ‘plan’ was to get married, have two and a half kids, get a dog, and live happily ever after. When I found myself divorced with two kids and no dog, then remarried, then widowed, it was pretty clear that my best-laid plans were dust. In a way, I was lucky. All of those things happened when I was relatively young. I had time to rethink my plan, both emotionally and financially. But I never could have predicted then where I’d be today.
Here are the things you can predict (aside, of course, from death and taxes!): we will get rain again in Southern California, and we will see a market correction. By planning for whatever may come your way, you can act with knowledge rather than react out of fear. That’s the value of a carefully crafted, long-term financial plan. Armed with a financial plan that includes both the best-case and worst-case scenarios, when life takes you off track (as it surely will), you’ll have built the muscle memory to face any challenge with resilience and strength. Best of all, you can head into the unknown with financial confidence and peace of mind. That’s an empowering way to face any storm—and even find your rainbow.