Crises during retirement can come in many forms: recession, divorce, pandemic, catastrophic medical expenses, natural disaster, disability, care for an elderly family member, or loss of an income source. However, we’re here to assure you that you can retire during a financial crisis, you’ll just need to prepare yourself.
The thought of being hit with a major negative event that could affect your finances can keep anyone awake at night. After bolstering savings, paying down debt, building up cash, and making sure all of your financial affairs are in order…it’s a lot to contemplate. Unfortunately, the environment you retire into can have a big impact on your retirement savings.
However, a solid financial plan can help you prepare. Here are our top ways to ensure you're best prepared for whatever the future may bring.
Build Your Emergency Fund
We've said it before and we'll say it again: Make sure you have enough saved to pay for unexpected events. Having some extra funds available for emergencies is an essential component of your overall financial well-being, with enough cash to cover six months of expenses being a common recommendation. Try the following steps to build up your fund, after all, the more you save, the less likely a crisis will affect you.
1. Set several smaller savings goals, rather than one large one. That will ensure you don’t stress your cash flow, making it too easy for you to rationalize abandoning your savings routine.
2. Create a system for making consistent contributions. There are a number of different ways to save, and as you’ll read below, setting up automatic recurring transfers is often one of the easiest.
3. Regularly monitor your progress. Find a way to regularly check your savings. Whether it’s an automatic notification of your account balance or writing down a running total of your contributions, finding a way to watch your progress can offer gratification and encouragement to keep going.
4. Park it somewhere safe. Money market funds and high-interest savings accounts are two good places to park your emergency fund. You need safe, liquid options so that your money is accessible in times of need.
5. While You're at it, Build a Reserve Fund Too. To be better prepared, create options for your future self to deal with a shock. Building cash reserves above a normal emergency fund, eliminating debt to lower fixed monthly payments, or working part time can help create financial slack to help you be agile as your retirement life unfolds.
Protect Your Cash Flow
Having a monthly budget is essential to keeping track of your financial health. Do you know where your money goes every month? If not, understanding your personal cash flow will help you better manage — and measure — your funds, should the worst happen. Cash flow refers to your income minus expenses over a set period of time. This term is helpful for both individuals and businesses as it can clearly indicate what direction finances are heading.
Anyone can determine their cash flow by creating a budget. All you need to do is write down your monthly income, including sources of passive income, and then subtract all your expenses. Instead of focusing on a single month, you may want to track your expenses for three months.
In the Event of a Crisis
If - or sadly, when - a crisis hits, you need to know what to do, and fast. Start by making some immediate cutbacks and rebuild from there.
1. Cut back expenses: Small changes add up. Make your coffee at home, reduce energy consumption, cancel unnecessary expenses like luxury food deliveries and even changing your cell phone packages can all add up.
2. Make more drastic changes: To cut back further, consider selling your second home/rental property, downgrade your car, take on a second job, refinance your mortgage, let your child help pick up their college expenses.
Start with the smaller changes and resort to the major changes if needed down the line. To better prepare for an unexpected financial shock, you need a sense of other funds they might have access to such as home equity line of credit or 401(k) loans.
Maximize Your Liquid Savings
Finally, cash accounts, such as checking, savings, and money market accounts—as well as certificates of deposit (CDs) and short-term government investments—will help you the most in a crisis. You’ll want to turn to these resources first because their value doesn’t fluctuate with market conditions, unlike stocks, index funds, exchange-traded funds (ETFs), and other financial instruments in which you might have invested.
Having liquid assets like cash is smart for any portfolio, especially during an economic downturn. Not only does cash come in handy for taking care of life’s unexpected expenses, it can also free you to take advantage of opportunities.
Life is unpredictable. So one last way to protect yourself for the future is by keeping your financial house in order now. You might think you don’t have the time or money to deal with these things on a regular basis, but they can create much larger disruptions of your time and finances if you ignore them. A solid financial plan will include various projections to help you determine whether your assets will provide you with the income required to fund your retirement, and prepare for life's major downturns.
Specializing in retirement income planning, Agemy Financial's objective is to see that their clients can retire and stay retired. Our purpose is to educate retirees - whether that be planning for retirement, legacy planning, wealth management, or just holding your hand when it's time to leap into retirement or out of a financial crisis.
Be prepared - and stay prepared - with our Fiduciary advisors at Agemy. Contact us here today to get started.