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Financial Fire Drill

By Sarah Carlson, CFP®, CLU®, ChFC®

Here in the Inland Northwest, we are recovering from our fire season.  Many community members were displaced, and some lost their homes in the Gray Fire.  What would your life be like if you were one of those victims?  Do you have much of your net worth tied up in your home value?   Would you be financially made whole if you suddenly were a fire victim?  How would such a loss affect your future, your retirement?

The Gray Fire can be a wake-up call for you and for you to be better prepared.  Consider doing your own "fire drill" on your financial life.  How prepared are you, especially as you plan and navigate towards your financial future?   Remember when you were young at school, you would go through the fire drill steps to ensure you knew what to do in the event of a fire.

Your fire wake-up call: Prepare to inspect what you expect with your retirement planning.

  1. Living Expenses: What are your living expenses when you are no longer actively working for a paycheck?  Consider factors like the cost of maintaining your home, energy costs, and transportation.   Now is the time to free up cash flow by downsizing your home and other lifestyle adjustments.
  2. What are your retirement goals?  Are you planning to travel more or less than you are now?  Do you want to start a new hobby or anticipate more time nesting at home?   Understanding your goals will help you determine the financial resources you will need.
  3. Healthcare Expenses.  Have you factored in a potential rise in healthcare costs?  Between medical costs and long-term care costs, do you plan to self-insure or maintain insurance coverage for these needs?
  4. Income Sources.   What sources of income will you have in retirement?  Your future income may include a pension, Social Security, and distributions from our investment portfolios.  Will these income streams go up with inflation?  Will these sources of income be enough to cover your living expenses?

Consider doing these things to test your financial fire drill.

  1. Budget Simulation.  Create a retirement budget and live on it for several months before retiring.  This exercise will give you a realistic picture of your expected expenses and identify areas for adjustments.
  2. Emergency Fund: Establish an emergency fund for unexpected expenses, including medical bills.   Aim for at least six months' worth of living expenses.
  3. Healthcare Costs: Research the costs of healthcare services and insurance plans.   Determine if you have any benefits with the new state long-term care program and what it would cost for an insurance program.  Going through this process will help determine whether you should self-insure.
  4. Social Security:   Explore strategies to maximize your Social Security benefits, such as delaying claiming benefits to increase your monthly payments.
  5. Pensions: Explore survivorship choices and whether taking a higher monthly income and having life insurance to cover your spouse makes sense for you.

Shifting from Accumulation to Distribution

One of the most significant shifts in retirement planning is moving from an accumulation to a distribution investment strategy.  Here are some key points to consider.

  1. Asset Allocation:  Reassess your risk tolerance and adjust your investment portfolio to align with that.
  2. Withdrawal Strategy: Develop a systematic withdrawal strategy for your retirement accounts.  The 4% rule is common, but individual circumstances may require adjustments.
  3. Tax Efficiency: Understand the tax implications of your distribution strategy.
  4. Professional Guidance: Consult with a financial advisor with more than five years of experience and who specializes in retirement planning.  They can help you transition from accumulation to distribution, ensuring a smooth and sustainable income flow.

With preparation and being proactive with your fire drill, you can help to ensure you won't get financially burned.


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Important Disclosures:

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
Securities and Advisory Services offered through LPL Financial, a Registered Investment Advisor. Member FINRA & SIPC.
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