An important component of financial planning that is often overlooked, and yet can derail any plan, is risk. When most people think of risk in financial planning, the focus is typically on investment risk and on minimizing that with a diversified portfolio. While that is certainly a critical part of a solid financial plan, there are other risks that need to be considered, as well.
It is important to look at all the potential risks, and prioritize them by what is most impactful at this point in your life. If you are the sole provider in a family with small children, affordable term life insurance is imperative. If you are contemplating retirement, have you forecasted your retirement assets to determine whether you will outlive your money?
Take a moment to consider where you are most vulnerable and determine, either on your own or with the help of a professional, what steps are needed to keep you on track in a world of unexpected surprises.
- A financial plan that is well-thought-out includes analysis of the need for insurance protection against various life-event risks:
- Life Insurance for replacing income lost with the death of a breadwinner
- Disability insurance in the event the breadwinner is unable to work
- Long-term care insurance to protect against high expenses that can drain assets
- Property and casualty insurance to protect your home or other precious items
- Personal liability insurance for other unforeseen events.
Outliving Your Assets
With life spans continuing to increase into our 90s, it is imperative to properly plan for a retirement that can last up to 30 years. This means understanding how your retirement assets will grow and shrink over time.
When the prices of goods rise and incomes do not, decisions need to be made in cutting the budget. If there is no equity exposure in your portfolio to avoid market risk, keep in mind you are making yourself more vulnerable to inflationary risk.
What if a sudden need for cash arises? Do you have access to your assets in an emergency? You don’t want to be forced to sell illiquid assets at a steep cost. A solid plan should include accessible funds to deal with the unexpected emergencies.