Sometimes I assume clients know things that they do not. To me these things are self-evident, even inevitable, but missing from the normal thought process.
That shortfall usually causes a communication problem when it come to financial planning. To address that, I am thinking about a template that takes me through the early risk part of the planning process.
We deal mostly with business owners and professionals, but the point is valid for everyone. For younger people, in every financial plan, there is a time risk. You might not get as much of it as you hoped or needed.
At least one of these three events will occur.
- You will retire
- You will become disabled
- You will die.
In all three cases, the income you earn in your normal way will stop. What should you do about that? It is like an earlier discussion about Herb Stein’s Law. “If a thing cannot continue forever, it will stop.” Earned income is one of those things.
At least one of the three outcomes is inevitable. Stein’s law requires one to think through the question of the stopping and the steps, processes or products that may make the stopping less problematic.
Usually appropriate insurance resolves death and disability. Insurance is a very easily implemented answer that people like to avoid. People avoid negative outcomes, and in the process neglect to make organized plans that resolve them. Future self must be afraid for the decisions present self makes.
Retirement planning is more fun. Investing is exciting. Profits, wealth and financial freedom are positive. Easy enough to address those. Except if:
- You do not have a clear income need and a clear start date for retirement.
- You measure your ongoing performance poorly
- You are not sufficiently disciplined
- You make it a do-it-yourself project without the do-it skills
Most inevitable outcomes can and should be managed by some process. If you have a problem that you can solve by attaching a process, both the problem and the process disappear frim your day-to-day thoughts.
Inevitable problems cannot be made to go away. The optimal solution is to understand the problem and attach a solution to it. A solution that neutralizes a problem is the same thing as making the problem disappear. As one colleague has said in respect to the tax liability at death arising from a frozen corporate equity. “You take the tax problem and the insurance policy and you put them both in a shoe box. You tape it shut, throw it in the attic and forget about it.”
If you keep the problem simple, you can make the solution simple too. Simple solutions tend to work even though they may not be the best solution in all circumstances.
The three inevitable time problems solve easily if you address the simple question, “If my income stops, how will I live?”
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Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.