As we met with clients in February, it was “business as usual”. College planning underway for the fall, retirement income planning recap for the previous year and what to expect in the coming years, review of tax implications from last year and what to expect in the coming. What a difference a month makes, but really, what has changed from a planning perspective?
The key principles remain the same. Make a plan, stress test it and follow it. Sure, that’s easy when the market is posting double digit returns, but what about when life suddenly gets put on hold? With unemployment at rates not seen since the Great Depression and a healthcare crisis not seen in 100 years, what do we need to do differently?
Over the next few weeks we will review key components of financial planning. This week we will focus on the importance of having an income bucket.
Everyone’s income bucket looks different
First, everyone should have an emergency fund. For those that are younger, working, or on a fixed income, the rule of thumb is to have 3-6 months of funds available to cover expenses that could arise if you lose your job or an emergency arises.
Most of our clients are in or nearing retirement, so the focus shifts to the income bucket from the emergency fund. When times are good, many don’t see the benefit of having money out of the market, but as soon as there is a bad year in the market, you see the benefit of having this for not only asset protection, but also peace of mind that you may continue to do what you always have, even if times are tough. I recommend protecting 12-18 months of income needed. Placing this in short term bonds, cash or other safe vehicles is recommended so it is not susceptible to volatility. Financial planning is not a one size fits all process. What works for your neighbor doesn’t necessarily fit for your situation. So while the average income gap we recommend protecting is 12-18 months, you may feel more comfortable having 24 months or even longer given what it needs to be protected for.
Do you need to top off YOUR income bucket?
Over the next 12-18 months, what level of funding do you want or need to have from your portfolio? While we review these needs each meeting with you, we want to make sure these next 1- 1 ½ years are covered as your situation or comfort level may have changed over the past couple of months.
If you plan to travel in the next 12-18 months (we realize this is an unknown given the current state of things), we want to make sure we have protected the amount you anticipate needing.
Has suddenly with “the new normal”, a new second home near a lake or beach crossed your mind? Is so, we need to plan for that.
Kids will continue to pursue higher education, although the fall semester may look a little different. We need to make sure we are planning accordingly.
So whatever your income bucket needs look like, please take a moment to think this through, talk to your spouse and then reach out to make sure we are part of that conversation as well. We want to make sure you are protected as we continue to experience volatile markets.
Whether you are an avid world traveler, planning for a specific special trip, expenses for a second home, or anything else that’s important to you, by having this income bucket carved out separately, you are able to take the emotion out of investing the remainder of your nest egg so you can stay focused on the long term. And studies have shown that those with a plan remain invested and over the long term perform better than those that do not. Emotion is a very powerful thing and can make us make decisions that we otherwise know are not in our best interest.
This is a difficult time for everyone as we all look for hope that there will be a cure for COVID-19, our cities will open back up so we can spend “normal” time with our friends and family and that our kids can go back to school where the teachers are well more qualified than us to teach our children. Please remember to take care of your own financial wellbeing as well as your physical and mental wellbeing as we all navigate these unchartered waters.
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The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation. Comments concerning the past performance are not intended to be forward looking and should not be viewed as an indication of future results.