The Capitalist Investor - Episode 32

Why do you need a financial backup plan? Because we don’t know what the future holds. Some people set to retire in 2020 may have lost up to 20% of their portfolio with the recent crisis. Or you might have cold feet about retiring with how uncertain life is right now. Or you may be one of the thousands who was let go this year and are retired by default. If you don’t have a financial backup plan for your plan—where does that leave you? In this episode of the Capitalist Investor, we talk about the need for a backup plan and what the planning process looks like.

Outline of This Episode

  • [0:16] Why you NEED a Financial Backup Plan
  • [4:13] What having kids teaches you about the economy
  • [6:42] You need to prepare for the “what-ifs” in life
  • [12:45] Why you need a robust financial plan
  • [15:44] Have a deep understanding of your risk tolerance
  • [17:22] The importance of properly allocating your assets
  • [19:18] There is NO one-size-fits-all investment strategy
  • [20:17] Financial backup plans are a game changer

Mommy & Me and the economy

When you’re preparing for the birth of your child, you usually put a game plan in place, right? You think through where you’re going to have the baby, whether it will be medicated or unmedicated, who the doctor will be, etc. If you have kids you know that whatever you’ve planned for likely won’t happen.

Everything you read, everything you expect—throw it all out the window. The baby might come early, your doctor might be out of town, or you/your wife may need a c-section. Life has a way of throwing curveballs, and you have to go with the flow. It helps you be prepared, but you just can’t fixate on it happening a certain way.

The important takeaway? Just like having a baby, things with the economy and your portfolio won’t always happen according to plan—but don’t freak out. There are alternatives, things will likely be just fine. But it’s why it’s important to have a backup plan for your plan.

A financial backup plan helps you prepare for the “What Ifs” in life

What happens if you retire at 63? What if the first year you retire your portfolio is down 20%? What if you lose your job? What if you get sick and have to retire? What if social security is lowered? What happens then? It’s not something that’s a one-size-fits-all answer for everyone.

You need to be prepared for these situations. You won’t be prepared if you don’t have a good financial plan. You want peace of mind about your retirement. You should be able to live your life and not worry about whether or not you can retire. It’s not about beating the S&P 500—it’s about seeing up a financial plan that helps you get reasonable yearly returns. So how do you achieve those goals? Enlist the help of a professional.

Have a professional help you prepare a financial plan

Very few people have financial plans in place—maybe 1% of the people we’ve met over the years. Of those 1%, most have inaccuracies in their plan. We will have analytical clients come in with a financial plan full of so many errors. I met a 65-year-old couple that was retiring and he had calculated they needed $75,000 a year to live off of. He had put together a beautiful spreadsheet. It showed their plan was perfect—they’d get $75,000 every year. But they didn’t account for yearly inflation or taxes. They’ll likely need far more than $75,000 yearly when they’re twenty years into retirement.

Likewise, you need to work with a financial planner to update your financial plan yearly to account for marginal tax rates, inflation, and an income strategy. Last year—with the market up 30%—your financial plan probably didn’t need to be updated much. This year? It’ll need an update. The more information that you have the better decisions you can make. It’s not always about ROI and investments. The moves you can make based on these plans are significant.

What becomes more important as you inch towards retirement

What you really want to take a look at—especially as you get closer to retirement—is reducing your volatility. It’s no fun to pull income out of an account that’s down 30%, right? How do you avoid that? Build out the proper buckets for your income and asset allocation and make sure you have enough guaranteed income. Guaranteed income is things such as pensions, social security payouts, annuities, etc. If your guaranteed income is below 60%, a bear market will adversely affect the long-term success of your retirement plan. That means that if your yearly expenses are $100,00 you need at least $60,000 of guaranteed income when you retire.

The bottom line is that there is NO one-size-fits-all investment strategy that is best for everyone. You need to do the financial plan first and that will give you the permission slip to get into a particular strategy, or it will help you to figure out which strategy is going to help your plan to be successful long-term. Plans are important, backup plans are important, but you have to update them every single year. Life happens. Sometimes you need to reroute and recalibrate—even after you’re retired. Listen to the whole episode of The Capitalist Investor for our full take on financial backup plans!

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Keep Listening to The Capitalist Investor:
Episode 5:
What We Consider A Smart Investment Strategy, Ep #5
Episode 22:
Play Ball! Why America Needs Sports, Ep #22
Episode 37:
What’s Next for Your Investments? Ep #37
Episode 6:
Why Investing In IPOs Is Not A Good Idea, Ep #6
Episode 21:
Kickin’ It With Kenny Polcari, Ep #21
Episode 38:
The 5 Keys to Retiring Early, Ep #38
Episode 7:
How a Joe Biden Presidency Will Impact Your Portfolio, Ep #7
Episode 23:
Elon Musk, Michael Jordan, and Capitalism, Ep #23