The Unexpected- Being Ready and Adapting to Financial Change

Certain events in your life are happy and planned – graduations, getting that job, having a child – and others may be sudden, unexpected and disturbing – as in the case of divorce.  We call these "life's critical events" and they can happen to each and every one of us, albeit not at the same time or in the same magnitude. But the associated financial consequences can be considerable.

Certain events in your life are happy and planned – graduations, getting that job, having a child – and others may be sudden, unexpected and disturbing – as in the case of divorce.  We call these "life's critical events" and they can happen to each and every one of us, albeit not at the same time or in the same magnitude. But the associated financial consequences can be considerable.

Projections illustrate how these critical events affect a person’s financial plan.  In order to create projections, financial advisors first gather your factual data – assets, and debts along with expected streams of revenue and expenses.  Your age is also important because we need to know how long the portfolio should last. Next, we make certain assumptions about the rates of inflation and return on your investments.  Finally, we stress-test the portfolio repetitively to determine the outcomes under good and poor market conditions during the period of retirement. We want people to have a 75-85% “chance of success” because, in this range, we are confident your money will last. 

Creating and testing projections is an interactive process.  If the chance of success is less than desired, we can reduce spending, shorten the length of retirement, or sell assets until we have confidence that the plan will work as expected.  If the chance of success is greater than 85%, we consider whether the client can retire earlier than planned or work in a different capacity for enjoyment rather than a paycheck.

Here are illustrations about how financial projections can provide people with enough information to make decisions about critically important aspects of their lives.

A client who is going through a divorce, projections can illustrate the long-term consequences of agreeing to a settlement proposal.  As a result of creating “what-if” scenarios, unique challenges such as downsizing, selling assets, and replacing income may be discovered and better equip her for negotiations. Another possible benefit is that the client's legal expense may be less because much of the leg work is already completed. 

Second client is newly divorced and works at a company which is being sold.  Its new management is letting numerous people go.  Working under these conditions is stressful, and the client wants to know how much she needs to earn in order to maintain her lifestyle and provide a good retirement.   Creating projections and stress testing the portfolio for different market conditions helps her determine whether she is financially stable and on the right path as a newly single person.

Looking toward the future, especially after a disorienting and upsetting event, is a sign of hope.  It's my humble privilege to help people make decisions which so profoundly affect their lives. Projections are a living, breathing document which can and should be adjusted over time, according to circumstances. When "life happens," use your financial projections to pivot, adjust your assumptions, and plan again for the future with the help of a trusted advisor.