Financial Planning Bites - Finding Your Financial Footing in Volatile Times
Financial PlanningAs we move beyond a presidential election year, the economy is navigating a period of change. While economic fluctuations are a given, today’s climate presents unique challenges. With inflation concerns, shifting labor and financial markets, and consumer confidence wavering, many are starting to feel the pinch. At the same time, the erosion of spending power is making financial planning more critical than ever.
But one thing remains constant: focusing on the fundamentals of financial planning. In times of volatility, it’s crucial to take stock of the basics and adapt to the shifting landscape.
In these unpredictable conditions, not every piece of advice will fit every situation. Some strategies may even feel counterintuitive. But with the right steps, you can still take charge of your financial future. Here are a few moves to consider today.
Cash Flow: Can the Price of Eggs Affect My Nest Egg?
Individuals are feeling the pain of inflation (and the avian flu) at the grocery store. The January Consumer Price Index from the U.S. Bureau of Labor Statistics shows egg prices are up 53% over last year at that time. But it’s not just egg prices that are going up.
Inflation rose to 3% in January, its highest rate for six months. That’s above the 2.9% expected by economists. While this increase might seem modest, it highlights a growing concern: the erosion of purchasing power over time.
For those with a solid financial foundation, maintaining sufficient liquidity and adjusting to changing economic conditions can help mitigate the impact of inflation on longer-term financial objectives. The real challenge lies in ensuring your resources continue to perform in line with your goals, even as costs rise.
One place to start is debt reduction. Review the interest rates on your credit cards, student loans, mortgages, etc. If you acquired debt when interest rates were at their peak, it may be worth exploring refinancing options. Or if you were aggressively paying down your mortgage by doubling payments, consider scaling back to the minimum if your monthly cash flow is tight.
Likewise, maximizing contributions into retirement vehicles, such as a 401(k), is a sound long-term strategy, but it doesn’t always apply when finances are in flux. A temporary pause, or reduction, may be necessary to increase cash on hand.
Shopping around for insurance can often generate savings in premiums. Consider reviewing expenses that are set on auto-pay, such as monthly subscriptions, and evaluate if any of these can be paused or cancelled when more cash is needed. That advice extends to expensive outlays on appliances or a new vehicle. Put those purchases on hold if you can.
Whatever the situation, when experiencing or expecting a reduction in income, a careful look at debt and expenses can help offset some of that loss.
For more stories behind the numbers, see MBI's wealth management focused newsletter “Market Bites".
Looking at the Big Picture
While it’s important to keep three to six months of expenses in an emergency fund—more when facing uncertainty—May Barnhard Investments (MBI) also advises a re-examination of your portfolio to ensure it is tax-efficient, diversified, yet flexible.
If you’ve unexpectedly lost your job or face reduced hours, it’s understandable to want to hoard your cash in the corner of your closet or a safe deposit box, but the value of your dollar will diminish that way. This is when it’s important to ignore your gut.
A carefully constructed portfolio, which includes holdings in both brokerage accounts and retirement accounts, is meant to protect you during times of volatility and provide a source of stable funds without losing your savings.
Prematurely pivoting to higher allocations in fixed income without consideration of your overall plan can lead to a reduction of your nest egg in the long term. That’s why the best course of action sometimes can be taking no action at all.
Early Retirement Considerations
Retirement is a turbulent time under any circumstances, as the process raises questions around health insurance coverage, Medicare, and Social Security. It also sparks an emotional reckoning with losing your identity after spending a lifetime building a career. Adding turmoil to the mix, such as facing retirement sooner than expected, can be particularly stressful.
If an early retirement is on the horizon, there are several planning opportunities to consider. For example, retirees younger than Medicare age may benefit from a Roth IRA conversion before the Income-Related Monthly Adjustment Amount (IRMAA) kicks in. Coupling this with a donor-advised fund may help reduce taxes on the conversion. Retiring sooner than expected also begs the question of whether delaying Social Security benefits until age 70—the maximum benefit age—is still the most financially advantageous decision. In many cases, the answer is still yes, but not always. With proper planning, you can devise a sound strategy even when facing the unexpected.
An examination of your full financial picture––your assets, current income, future expenses, and future retirement sources––will ensure flexibility while staying on track over the long term.
Hot Takes & Quick Bites
Relief may be on the way if you were subject to the Windfall Elimination Provision (WEP) or the Government Pension Offset (GPO), which reduced the Social Security benefits of over 3.2 million retirees who receive pension payments from an employer that did not pay Social Security tax.
A recent repeal of the WEP and GPO could result in an increase in your benefits retroactive to January 1, 2024, potentially providing a lump sum payment. If you believe you are eligible, MBI can evaluate your individual situation to help you build retirement plans with flexibility and resiliency. It’s also important to contact the Social Security Administration to confirm your eligibility and get the updated benefit amount. Find more information and FAQs here.
How MBI Can Help
If you feel uncertain about your income, expenses, or financial stability, we are here to help update your plan and get you back on solid footing. Are you facing a possible job loss, cash flow restrictions or retirement? Stop, breathe, and let’s review your plan together.
Future Financial Planning Bites newsletters will take a deep dive into the financial planning issues that are often experienced by our clients and their loved ones.