When we were down at the beach last summer, we pulled into a gas station to get some gas. An old, blue, beat-up pickup truck pulled in next to us. In the back of the truck was a small dinghy. The name on the back of the boat was “Plan B.” I wondered what the owner’s Plan A was? My guess is that it was probably a large yacht named Leisure Time. What exactly is Plan B? It’s what’s needed if Plan A doesn’t work out as planned. Face it—things change. Sometimes things change a lot. Everyone needs to be prepared for changes, even if you don’t necessarily like them. It’s important to always have a Plan B.
Life Changing Events
With financial planning, you are preparing for the future. Even though the future is unknown, it still needs to be planned for. If you have Plan A, you need to have a backup plan. Why? Simple—everything changes. The following are just a few life changing events you might face:
- Having children
- Career changes
- Becoming disabled
- Receiving an inheritance
- Death of a spouse
Some of these events can be planned for and others cannot. These changes will require your financial plan to be updated. Remember—life is a movie, not a Polaroid. Sorry, there I go dating myself again. The point is that time marches on and, well, things just change. You can still pull out your old black and white Polaroid’s. There’s nothing wrong with taking a walk down memory lane. Unfortunately, the “Movie of Life” always seems to be played at warp speed. Life should be a journey not a destination. Don’t forget to enjoy the ride!
A great financial plan can be drawn up. Unfortunately, things don’t always work out as planned. Be prepared to adapt to the changes that will occur. Sometimes life throws us a curve ball, usually when we least expect it. What can go wrong? Start with the basics…When planning, assumptions need to be made regarding what is expected to happen in the future. The inflation rate, rates of return, annual amount saved, and the year of your retirement are just a few of the assumptions. What happens if the assumed rate of return on the investment portfolio is 9% and the actual return is only 7%? Will some changes need to be made? Yes. They will in order to stay on track. Other changes to consider are:
- Will you need to save more?
- Is your life insurance coverage sufficient for your growing family?
- Is it time to buy long-term care insurance?
- Are you taking advantage of any new tax planning opportunities?
- Is the asset allocation consistent with your goals?
- Does your will and trust documents need to be updated?
These are just some of the changes many people could be faced with. Monitoring the plan allows you to update your progress towards your goals and objectives.
Plan B will mean different things to different people. Naturally, someone could continue to work beyond what they had originally planned. Or perhaps they could continue to work part-time in retirement. If a retiree kept working, they would continue to have some earned income to help pay their bills. Having extra income is always a good thing. However, let’s take a look at the other side of the coin. How can you reduce your bills? One effective approach for retirees or pre-retirees to reduce their annual expenses is by downsizing. What should have the biggest impact on your downsizing?
Start by looking at your housing costs. After all of your children have moved out, do you still need that four bedroom, two-and-a-half baths, three car garage colonial? If not, perhaps it’s time to sell it and get something smaller. I know it’s not an ideal time to sell. However, with home prices and mortgage interest rates down, it’s a great time to buy. Take a hard look at the costs of maintaining your home. Property taxes, homeowners insurance, utilities, and maintenance usually cost a lot less on a smaller house. Go back and take a closer look at your annual living expenses. Which of these expenses can be reduced or eliminated? Do grandparents need to keep spoiling their grandchildren? Okay, perhaps this isn’t a good place to start. I guess they do. But go through your budget…sorry, I mean spending plan again carefully. What’s in there that could be cut back?
Cutting back on things is easy to talk about. Usually, it’s more difficult to implement. I understand this. Start by looking for any low hanging fruit. Are there things you spend money on every month that you just don’t use or need? Take a look at your credit cards. Are there charges every month for the gym membership and home delivery of movies? Are you still using these? If so, are you using them enough to justify paying for them? Working out is highly recommended and good for you. The question is….can you get a decent workout without having a gym membership? Some people can and some can’t. If you need the gym to have an effective workout, so be it—keep the membership. The point isn’t to give up exercise. The point is to try and find some monthly fixed expenses that can be eliminated. Also, take a look at your insurance polices. Homeowners, auto, and personal excess liability (umbrella) policies all have deductibles. Take these policies out and have a conversation with your insurance agent. Should the deductibles be increased? Is the coverage still appropriate?
None of these examples taken individually will likely change your lifestyle. However, taken collectively with other reductions in your spending plan may begin to make Plan B a little easier on you.
If you would like help with your “Plan B” give us a call at (860) 645-1515 or e-mail:
Thomas F. Scanlon, CPA, CFP®
Thanks for your referrals.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Thomas F. Scanlon, CPA, CFP® and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Tax preparation and accounting services are provided by Borgida & Company, P.C., not as a service of Raymond James. You should discuss tax or legal matters with the appropriate professional. Past performance may not be indicative of future results.