Reducing Stress by Planning for the Unthinkable

The importance of preparing your nest egg for unexpected shocks
Written by: Drew Kellerman

A few weeks ago, an extraordinary new movie released into theaters; 12 Strong. It’s based on the true story of our first military response to the attacks of 9/11. Six weeks after the towers fell, twelve Special Forces soldiers inserted into the desolate mountains of Afghanistan, linked up with Northern Alliance fighters, and proceeded to strike back at Al Qaida and the Taliban…on horseback.

Most American’s don’t know about this remarkable mission, as it was classified until recently. The movie is Hollywood’s most accurate, modern portrayal of the US Army’s Special Forces in action. I highly recommend it to those that like that sort of thing.

As a former US Army Ranger, I did notice one thing that was missing from the script; the detailed contingency planning the team conducted for weeks prior to deploying. Granted, most moviegoers won’t notice this and wouldn’t care if they did. They don’t want to watch a group of guys sitting around discussing and coordinating how they will respond to every unwanted scenario. Boring.

Nevertheless, combat units develop detailed plans for the things that might go wrong during a mission. Their success, and their lives, often depend on how well they can react to and cope with worst-case situations. They also know that they cannot anticipate every scenario, so they build as much flexibility as possible into their plans. That way they can adapt and improvise to a changing environment.

You might think that this focus on worst-case-scenarios leads to worry, anxiety and fear. In fact, the opposite is true. Why? They fully expect to achieve success because they know they are as prepared as possible. This leads us to an important truism: Being prepared for things to go wrong actually reduces stress and worry.


Financial Contingency Planning

Of course, financial planning is not the same as preparing for combat. Our lives are not usually in immediate danger if we make a poor investment decision. Even so, common sense tells us that every financial plan should include contingencies and flexibility in case undesirable and unexpected things happen. Importantly, this can also help reduce money stress and worry should a financial storm arrive.

We recommend that you have a balanced, “all-weather” financial plan designed to:

A) thrive, should clear weather continue and
B) survive, should a major financial storm blow through.

The following five what if scenarios are examples of what we mean by a “major financial storm”. Are you prepared for these?

1. What if the stock market crashes and does not recover for years?

The S&P 500 index has experienced positive returns every year since 2009 and hasn’t seen a drop of 10% or more in two years. In 2017, we witnessed something that has never happened before; this index posted positive returns every single month.

It seems that fear of potential losses has been replaced by “FOMO”, the fear-of-missing-out on potential gains. Optimism and even euphoria has returned. (Historically, these investor emotions usually occur near the top of a market cycle.)

While the uptrend in the stock market may continue for a bit, we must remember that stock prices have always been cyclical. Uptrends are followed by downtrends. There is a high probability that US stock prices will head lower at some point. When this happens, it is possible that this sell off could evolved into a severe “bear” market, lasting for several years.

Is your financial plan prepared if stock prices drop significantly and don’t recover for years?

2. What if long-term interest rates continue rising?

Since 1798, interest rates in the US have cycled up and down in multi-decade trends (i) . The most recent cycle began in 1946, just as World War II ended. That year, 10-year US Treasury note interest rates bottomed at 2% (ii). They then trended higher for 36 years, peaking in 1981 at more than 15%. For the next 35 years, they trended down to an all-time low of 1.37% in July 2016. It now appears that interest rates are rising again.

Over the last 18 months, the yield of the 10-year US Treasury note has literally doubled. This is a huge move and appears to have “broken” the downtrend. If interest rates continue to rise and follow their historical pattern, portfolios that are now heavily invested in long-term US bonds could suffer significantly.

Is your financial plan prepared if interest rates continue trending higher, perhaps for decades?

3. What if higher inflation appears, eroding the buying power of money?

Over the past 10 years, the inflation rate (how quickly prices increase) has ranged between -2% and 5.5%. Today, inflation is hovering at about 2% (iii). Historically, this is relatively tame. During the early 1980’s, we experienced inflation rates that were eight times higher that we have today. Many have forgotten the insidious, corrosive impact that high inflation can have on the purchase power of money.

What if all the “money printing” during the past 9 years finally causes inflation to heat up? Are your income sources inflation-protected? To what degree? Maintaining your accustomed lifestyle into the future will likely depend on the ability of your nest egg and/or income streams to grow with the inflation rate.

Is your financial plan prepared if significant inflation returned?

 4. What if your pension income is cut in half?

A pension’s guarantees are only as good as the solvency of the pension plan itself. Some pension plan analysts are strongly warning that many private and public pensions are significantly underfunded and will need to experience unrealistically high growth rates during the next decade to stay solvent (iv). 

The current combination of low yields on fixed investments, historically low dividend rates (due to stocks being very expensive), the huge numbers of retiring Baby Boomers and our aging demographics all factor into the potential of unsustainable pension promises (v). 

Is your financial plan prepared if your pension income were to drop significantly?

5. What if Social Security is forced to cut back on benefits?

Every year, the Social Security trustees warn that the system is headed towards insolvency. The 2017 report stated, “Trust fund reserves are projected to become depleted in 2035” (vi). One of their proposed solutions is an “immediate and permanent reduction in benefits to all current and future Social Security recipients.”

Granted, no politician who wishes to stay in office will publicly support benefit cuts. At some point, though, they are going to be forced to address Social Security’s funding shortfall. While we don’t know how they will “fix” the system, we can’t rule out a reduction in benefits, especially for the “wealthy”.

Is your financial plan prepared if Social Security benefits are permanently reduced?


Deep breaths…

To be clear, we are not suggesting that these what if scenarios are going to happen. Hopefully, none of them will. That said, you don’t want to be caught unprepared if they do. Avoiding the subject won’t help you.

No one really wants to plan for worst-case scenarios, even Special Forces soldiers. But failing to develop contingency plans for hard times is unwise. The key is to face the possibility of these scenarios and create plans to deal with them before they occur.

Just imagine if your financial plan factored in as many what if situations as possible. Picture yourself with a nest egg portfolio that is structured for sustainability in the face of a “financial storm”, including flexibility to help cope with future unknown events. Would that help reduce fear, stress and worry?

This is exactly what we do for our clients. If you’d like to explore what an “all-weather” financial plan can do for you, give us a call or send us an email.

As always, we are here to help you with your distribution and retirement income planning. Just give us a call!