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Financial Plans and Risks


Recently I have been listening to some Webinars about retirement, which are sponsored by my financial advisor’s company. One of the most interesting to me was managing risk relative to your financial plan for retirement. I thought I would share some thoughts from this webinar with you, which you might find helpful.

As a believer, this subject of planning, especially financial planning, immediately returns us to the issue of the Sovereignty of God vs. man’s responsibility. Do I really need to plan? Why not just pray and trust God. “Let go and let God?” God is Sovereign, and He establishes all of my steps. A brief visit to Proverbs convinces me that God expects us to plan and endorses prayerfully considered plans. Prov 16:9 – “The heart of man plans his way, but the LORD establishes his steps.” (see also Prov 16:3, 20:18, 21:5). I do not believe that a philosophy of “let go and let God” honors Him. So let us plan for retirement, and may our plans be bathed in prayer and made after seeking the counsel of wise advisors.

The Webinar in question identified the following risks that we should consider when developing our financial plan:

·      Longevity – you outlive your plan (your money)

·      Healthcare – you don’t plan well enough to cover healthcare (the average couple will spend about $285,000 on healthcare during retirement)

·      Underperforming Investments – your actual return is less than projected

·      Withdrawal – you withdraw too much money too early

·      Interest Rate risk – interest rates are different than what was assumed

·      Taxation risk – failure to plan properly for taxes (on Social Security or RMDs or unforeseen property taxes, etc.)

·      Long Term Care expense – not anticipating for you and/or your spouse (a private room in a nursing facility: $105,000/yr average)

·      Elder Abuse – getting scammed or being a victim of fraud (90% is committed by a member of the family)

·      Inflation risk – actual inflation is different than assumed, especially hyper-inflation

One of the hot business topics today is risk-management. Risk management requires us to evaluate all of the risks associated with our plans to determine how to best mitigate the risk if possible. Risk is actually a product of the risk’s Impact x the likelihood (probability) that it might occur. For instance, in the list above, you might consider Elder Abuse; the risk to you personally, since you are sound of mind and streetwise, might be very low (the impact could be very great, but you consider that the probability is near zero). So, in this case, you might decide that Elder Abuse presents a very low risk, and therefore you don’t need to plan on how to mitigate that risk—and you don’t need to consider it further.

On the other hand, you might consider inflation. If your retirement savings are all invested in long-term Treasuries (paying you a handsome 3%), and you think that inflation may begin to increase and possibly result in a period of hyper-inflation (like 1981), the risk to your financial plan could be very great (huge impact, moderate probability). Hence, in your analysis, this is a risk to your financial plan that needs to be considered and actions to mitigate it. So, in developing your financial plan, you might decide to diversify your portfolio, adding some equities and some short/mid-term debt instruments to balance it based on your needs.

I certainly don’t advocate drafting a detailed risk analysis. However, I do think it’s beneficial and wise to view our financial plan through the filter of these various risks and ask ourselves if there is anything we should/can do to reduce (neutralize) each of these risks. I think this is sound planning. James 1:5. And, of course, none of this is a substitute for prayer and trusting Him.

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