It’s a lesson we learn at an early age, whether we realize it or not. Look both ways before you cross the street. Brush your teeth. Put on sunscreen. Don’t swim 20 minutes after you eat. Every day we make seemingly small decisions that ultimately boil down to managing risks, even though we don’t call it that. You’re thinking that’s just common sense, but really those actions are measures meant to protect something you care about. That’s risk management.
And it’s a lifelong endeavor. Yet, as adults, we sometimes hesitate when it comes to facing risks, either because we fear the outcome or, perhaps worse, we think we’re immune. The fact is that the risk is still there; the potential loss is the same. The question is can you recognize the risk and protect against it? Sometimes facing an unknown is unnerving or overwhelming, so we avoid it altogether. That strategy has a lot of flaws, leaving you, your family, your property and maybe even your business exposed and vulnerable.
So let’s break down the many types of risk into more digestible components and look at practical ways to manage them.
While you can never completely eliminate risk from your life, you can take steps to create a safety net for you and your family through thoughtful risk management. And, you don’t have to tackle it all at once. Here are some things to think about if you’re looking to protect …
Your Health
Health is the first wealth, according to Ralph Waldo Emerson, and it’s probably the most important. Taking care of your mental and physical health is essential. So we exercise, try to eat right, go to the doctor and try to manage our stress levels. We buy health insurance or we actively make the choice to self-insure. The problem there is that even one hospital visit could devastate our savings, so most people avoid the risk and pay the insurance premiums instead. There’s a parallel here to long-term care insurance, too. One of the risks we all face, regardless of age, is the potential for sudden illness, injury and, subsequently, the need for long-term care. The need goes up exponentially as our life expectancy increases.
Can you afford to pay out of pocket for the type of care you’d like or need? Even if you manage to set aside $100,000 for elder care purposes, that may only cover a year or two of quality care. A smarter way to ensure your future quality of life might be to invest that pool of money into a policy that offers long-term care benefits if needed, as well as other flexible features should you decide to discontinue the policy (return of premiums) or if you pass away without ever needing to use the policy. The point here is to educate yourself on the realistic costs of care, and ways you can pay for it should you ever need it.
Your Income
You’re good at your job, great even. You’re at the peak of your career. But no matter how secure you are in your job, it is always a good idea to protect your human capital – your ability to earn income. Not just for yourself but for your loved ones. Should sickness or injury waylay you, having adequate disability insurance can help provide for your household.
Your Investments
Risk and reward go hand in hand; it’s inseparable from performance and is a necessity when it comes to investing. Every investment, even one considered relatively safe, involves some risk.
The key is knowing whether you’re willing to take on the risk for the potential reward. And understanding how diversification, asset allocation and rebalancing may mitigate some of the risk when it comes to your financial plan. Proper asset allocation, for example, means finding the right balance of investment strategies that are aggressive enough to help you reach your goals, while also being suitable from a risk perspective. There’s no need to swing for the fences in search of high returns if it means burdening yourself with more risk. As you make selections, consider your time horizon and liquidity needs as well.
Your Retirement
Although each path is unique, the ultimate goal of every retirement plan is basically the same: to ensure that your money lasts at least as long as you do and, ideally, even longer. Hopefully, you’ll have enough left over to bequeath to a beneficiary of your choice. Eventually, though, you’ll start withdrawing more money than you’re putting in, so you’ll want those assets to be as secure as possible while still generating dependable income. You can help mitigate the impact of longevity risk to your retirement savings by adjusting your spending, investing in income-producing securities, and accounting for inflation. The right risk-management approach, accompanied by diligent monitoring of your investments, also can help you better understand exactly what you can spend to cover your needs and wants while increasing the probability that you won’t outlive your money.
Your Legacy
Having a documented, well-structured estate plan is in itself a great way to protect your legacy, and be confident your loved ones are cared for when you are no longer able to do so. By putting in writing your wishes for your estate and its distribution, you can ensure the transfer of assets to your beneficiaries is as seamless and tax-efficient as possible.
But that’s not enough. You’ll also want to document your end-of-life wishes to alleviate some of the burden on your family if they have to make decisions for you in a time of crisis. That means having a living will, powers of attorney and medical directives (even funeral plans) in place well before you ever need them. Think of all the planning as a future gift to your loved ones.
Remember, too, that you’ll have to keep your estate plan up to date as your life changes (e.g., remarriage, divorce, inheritance) and even as tax laws change. Like your financial plan, be sure to conduct regular reviews and update your estate plan documents, like your wills, trusts and powers of attorney, accordingly. Part of that is updating your titling on property and trusts, as well as the beneficiary designations on everything from your retirement accounts to your insurance policies, which should be regularly reviewed at least once a year.
Be Prepared
The Scouts got it right with this. The best way to protect yourself, your loved ones and your hard-earned assets is to be prepared. That means acknowledging that risk is a part of life, even if you don’t want it to be. While we can’t avoid risks altogether, we can be as smart about it as possible. Thankfully, there are a number of solutions to help you manage the unknowns that could affect your life and your financial plan. But it does take the right approach, a little discipline and a lot of diligence to assess the things that could send you off track.
It is prudent to weave a safety net by regularly reviewing – and adjusting – your portfolio, estate plan and insurance policies to make sure they meet your needs at every stage of your life.
Tom King CFP®, CLU®, AEP® is Registered Principal of King Financial Partners goKFP.com at 222 Blue Course Dr., State College, PA. King Financial is a team of credentialed professionals specializing in retirement, investment management, wealth transfer, and estate planning. Tom can be reached at Tom@goKFP.com or (814) 234-3300.
There is no assurance that any investment strategy will be successful. Investing involves risk including the possible loss of capital. Asset allocation and diversification do not ensure a profit or protect against a loss. Dividends are not guaranteed and will fluctuate. The process of rebalancing may result in tax consequences. Sources: Raymond James Worthwhile Summer 2015. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC.© 2021 Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. King Financial Partners is not a registered broker/dealer and is independent of Raymond James Financial Services.
