As we start to look in our rear-view mirror at 2024, one of the most noteworthy aspects of last year was the large number of elections held worldwide. More than 100 countries went to the polls last year representing four billion votes cast1. Consequently, 2025 could be a transition year for global politics, which could then translate into heightened market and economic volatility.
If one is also traversing a life transition, preparing for market and economic volatility can quickly take a backseat to tasks on the never ending to do list. We have some practical tips to ensure you are prepared to weather potential economic storms.
Whether you are preparing to retire in the next few years, sending a child to college, contemplating downsizing or any other significant financial decision, here are several practical steps you can take to reduce the risk to your financial plan for any economic environment during your transition.
Typically, you may meet with your financial advisor annually with a few touchpoints throughout the year, as needed. If you are preparing for a significant life transition, increasing your communication with your advisor may help ensure family members are aligned and may help iron out details that previously went unaddressed.
For instance, when retiring, it takes time to make the mental shift from saving and growing our retirement savings to beginning to take portfolio distributions. Understanding how monthly cash flow changes from our working years to retirement can help alleviate stress and make the mental leap. Your advisor can work with you to establish a monthly portfolio distribution replacing your prior paycheck to supplement other retirement income.
Similarly, saving many years for your children’s college and then transitioning to draw down the 529 accounts can be unnerving. In both scenarios, your advisor can ensure you understand the assumptions underlying projected future cash flows and can illustrate how long the funds are projected to last.
If a significant portion of your portfolio will be needed for an upcoming expense, when the market is up, it may be time to realize some gains and start shifting funds out of equities and into fixed income securities. Fixed income securities are typically much less volatile than equities and can be relied upon for preservation of capital and provide a source of liquidity.
Increasing your emergency funds is another strategy to increase liquidity during times of transition. It is prudent to keep three to six months’ worth of living expenses in a highly liquid account for unexpected expenses. Depending on the circumstances, it may be helpful to increase your emergency funds to 12 months’ worth of living expenses during a transition.
If the pending life transition is retirement, working longer is one way of reducing the risk of this major transition. Your advisor can quantify the impact working longer has on your plan. Alternatively, some retirees gradually transition into retirement by reducing their workload or by taking new part-time roles for the first few years of retirement. This shift is not all about easing the financial shift, it is also about gradually changing our mindset, identity and day to day life.
Creating a realistic budget can also help prepare for a life transition. Tracking your expenses is a first key step in determining how much is needed to cover your essential expenses.
Test drive your retirement! It may be illuminating to try living on your retirement budget, explore how you will fill your day, look at your goals or bucket list and how much you will need to fund those goals.
Managing through significant life transitions can be made easier by leveraging the expertise of your financial advisor. Your advisor can serve as a sounding board when the ideas are in their early stages, quantifying abstract options being considered. Communicating early and often with your advisor can help clarify your thinking and help you understand impacts to your financial plan. Advisors have the benefit of traversing many permutations of these life transitions with many different clients. Why not tap this wealth of knowledge and experience to inform your decisions?
Sources
1 List of elections in 2024 - Wikipedia
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