By Keith Whitcomb
According to a recent Society of Actuary’s (SOA) study, unexpected financial shocks are common and can often jeopardize retirement security for both pre- and post-retirement individuals. What can you do to avoid the fiscal stress associated with these periodic events?
One way to prepare for unexpected financial shocks is to make them less unexpected. How do you do that? Take some time to define and categorize risks that could negatively impact your financial wellbeing. Donald Rumsfeld put it this way:
“…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns — the ones we don’t know we don’t know.”
Here are some financial examples of what Rumsfeld is talking about:
Defining the “known knowns” - If you build a beach house on the coast of Florida, you know (or should know) that there is a chance your property could be destroyed by the high winds and torrential rains of a hurricane. In essence, you know the property can be damaged and you know the value of the property.
Understanding “known unknowns” – Everyone knows they are exposed to aging. That makes us all susceptible to physical and cognitive decline. However, the cost, timing, and specific outcomes are all unknown.
Acknowledging “unknown unknowns” – No one foresaw or planned for the COVID-19 pandemic or the Russian invasion of Ukraine. These are classic “we don’t know, we don’t know” risks.
1) Categorizing Knowns and Unknowns
A good first step to take when managing risk is to put the exposures you face into financial perspective. Start by estimating the likelihood and costs of the shocks. Next, group them into the following framework to help you formulate your financial plans.
2) Learn from your elders
Throughout the SOA study, retirees were consistently less concerned about financial shocks when compared to pre-retirees. What are they doing differently? Perhaps it is that fearing the unknown aspects of retirement are eliminated once you retire. However, it may also be that retirees are better prepared when it comes to all the details associated with retirement. Getting your administrative act together could help you alleviate the anxiety of unknown financial shocks. Here are some statistics from the SOA study that illustrate this point:
3) Taking Action
According to James Belasco, “Knowledge is nothing without action.” Now that you have a better understanding of the exposures you face, it is important to take action to reduce the negative impact these risks can have on your financial life. Here are some suggestions:
Understand all resources – A full understanding of financial resources including assets, debt, insurance, government, and family or faith-based safety nets is critical.
Contingency planning – Establish contingency plans for dealing with financial shocks. That includes the prioritization of funding resources and spending strategies when a shock hits. It also means that family members responsible for responding in emergency situations have specific instructions laid out in the event of an accident or other financial crisis. Resources like disability insurance, HSA funds, critical illness coverage, or a hospital indemnity policy are of little use if designated care advocates are unaware of them.
It is best to consider shocks to your financial wellbeing before they arrive, even if the solutions are difficult. If you need help getting started with your list of shocks, check out the SOA study. It describes a number of risks faced by pre- and post-retirement individuals. Finally, it is likely a good idea to get a professional involved with your financial plans. They will be able to help you navigate all the ins and outs of financial products and strategies as you face financial shocks over your lifetime.
About the author: Keith Whitcomb
After completing his MBA at Ohio University, Keith worked in the Finance Department of Wegmans Food Markets for 13 years. He eventually became the Manager of Corporate Investments, a position with responsibilities that included monitoring over $270 million in retirement assets for 7,200 participants and upwards of $700 million in interest rate swaps. More recently, as Director of Analytics for Perspective Partners, Keith helped develop web-based analytical tools that were distributed to over 100,000 401(k) participants and used by award-winning plan sponsors. In September of 2021, Keith joined Moldenhauer & Associates to work directly with individual clients as they financially transition into retirement. Keith has also written wealth management articles for online sites and has been quoted by many publications including USA Today, MarketWatch, and TheStreet.