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Planning for the Unexpected

In times of uncertainty, staying the course generally is the best plan.

As appeared in Wealth magazine

Planning for the Unexpected

In times of uncertainty, staying the course generally is the best plan.

You probably know of at least one fictional character whose unexpected inheritance from a long-lost relative spirals their life into a rags-to-riches tale. While most stories don’t play out quite that dramatically in reality, life will bring changes — both good and bad — that you didn’t see coming. Here to explain how to prepare for the unknown is David Williams, director of Trust and Advisory Services at Northern Trust Wealth Management.

Wealth: How can you make sure your financial plan is flexible in the face of change?

Williams: Abraham Lincoln said, “Give me six hours to chop down a tree, and I will spend the first four sharpening the axe.” Your financial plan is like that axe. It’s a tool, and you need to make it work for you. Its purpose is not only to help you meet your goals through proper management of your finances, but also to guard against life’s surprises. A good financial plan has flexibility built into it from the start, so you’re prepared for planned changes, such as marriage or retirement, as well as unexpected changes like an accident or illness.

Understandably, most people prefer not to think about misfortune, but as financial advisors, it’s in our DNA to bring it out into the open for discussion. For example, if the breadwinner of the household dies unexpectedly, what would become of the family? We look at all the possibilities and make sure your plan offsets financial losses through life and disability insurance, savings and other safeguards. As your life changes, so should your plan. Periodically, you’ve got to go back and sharpen the axe.

Wealth: Under what circumstances should someone consider changing a financial plan?

Williams: An annual review is generally recommended to make sure your plan supports changing goals and circumstances. Discuss with your advisor what you want to achieve in the short term, medium term and long term. Determine the timing of these goals, and allocate appropriate assets in order to meet those objectives and target dates. A goals driven wealth management approach aligns your investment strategy with your financial objectives, which change over your lifetime. Therefore, in addition to your annual review, significant life changes or milestones such as marriage or paying for college are good reasons to look over your plan and perhaps re-allocate assets.

Wealth: Even with a plan in place, how can you account for things that are beyond your control, such as tax changes or other policy reforms?

Williams: Proposed policy reform is raising questions when it comes to investing and wealth management. People are uncertain about how those proposals will impact the markets and the economy, or what will even come to fruition. Social Security “means-testing” has been an area that the Republican-controlled House and Senate have been working on. This is a good example of where people can sit down with their advisors and recalculate their anticipated retirement income with or without Social Security benefits to picture how each scenario might affect their retirement timing and future cash flow.

On the plus side, income and corporate tax reform may reduce the tax burden on business owners and investors. While repeal of the estate tax has been proposed, the prospects for large scale changes in the tax laws this year have been diminishing. With these uncertainties, it’s better to stick with a goals driven approach to wealth planning as opposed to a fear driven approach

With or without the estate tax, most people still need to plan for family, legacy, and future generations, as these remain paramount concerns for our clients. Wills, trusts, living wills, power of attorney; all are key ingredients of a plan regardless of a tax on estates. It may also motivate generational dialogue around wealth, money and meaning. For some, this could certainly elevate the use of written statements of wealth transfer intent (SOWTIs) in the estate planning process. The SOWTI, a personalized declaration of your intent and purpose behind your wealth transfer, can help protect against the misuse, mismanagement and misappropriation of your bequests, but does not replace the legal documents listed above.

Wealth: If market volatility becomes a concern, how do you know when to react or just ride it out?

Williams: This is why a goals driven planning process is built to sustain market distress; it allows for staying with your overall strategy rather than making sudden changes. Depending on an investor’s age, time horizon, goals, timing of those goals, earning potential and other factors, often the worst response is to overreact. Short term goals should not be treated like a goal that is 15 years in the future, where time is your ally. Here again, by refreshing your plans, goals, and timeline, you gain more confidence that you are on the right track and can weather volatility.

Change is the only constant in life, so your financial plan should change over the course of your lifetime. You’ll want to plan for predictable milestones and events as well as surprises. By constantly refreshing your plan and your goals, you can be prepared for both the expected and the unexpected.