Planning For What Ifs And Whens

[INTRO] BOB: Welcome to Christian Financial Perspectives, a weekly program where we talk about ways to integrate your faith with your finances. This is Bob Barber. MJ: This is Mary Jo Lyons. Bob: Are you ready to learn the truth about money from a biblical perspective? MJ: Join us as we discuss what God’s Word says about money and integrating your faith with your finances… If it’s your first time listening, welcome to the program. If you’re a returning listener, welcome back. [EPISODE] Mary Jo: The wise and foolish builders. This is from Matthew chapter 7:24. “Therefore, everyone who hears these words of mine and puts them into practice is like a wise man who built his house on the rock. The rain came down, the streams rose, and the winds blew and beat against that house, yet it did not fall because he had its foundation on the rock. But everyone who hears these words of Mine and does not put them into practice is like a foolish man who built his house on sand. The rain came down, the streams rose, and the winds blew and beat against that house, and it fell with a great crash.” Bob: So, today, we’re going to be talking about those what-ifs and whens in life and how to plan for those. You know, Mary Jo, that is such a great scripture on building, and this is all about building on the foundation of Christ, but it’s a great parable for anything we do in life that we build a really good foundation. I’m building a home right now, and I think about our home. We want to build that on a great foundation. Today, we’re going to be talking about that foundation for financial planning. As you and I were putting this program together, planning for those what-ifs and whens, it made me think about a couple that came in to see me about a month ago that were in their mid-30s, just such a sweet, dear couple, had one child that was 18-months-old. They both have careers. They both have a 401K, and they’re contributing to that. But when they came in, all they wanted to talk about was setting up a 529 plan for their child, which is a wonderful thing. Yeah, it’s a good thing. But when I started talking to them, they had no estate plan, no medical power of attorney if something were to happen to either one of them, no durable power of attorney for financial reasons, no assigned guardians for the child set up. They really didn’t understand their 401Ks or the investment risk that went with it. They weren’t sure about life insurance and what their needs were or if they became disabled. They had not thought about any of those what-ifs and whens in life. Mary Jo: So planning impacts most areas of our lives, not just our finances. That’s the planner in me. I kind of plan through everything. Not too long ago, we were going to go to a Music in the Park event, and I’m thinking through and I’m planning on what-ifs and whens. So, what if it rains? What if the mosquitoes are bad? What if we get hungry? What if it’s windy? You get the picture. You have to plan for contingencies no matter what you’re doing, but it’s especially true in your financial life. Bob: You do, and your financial life you need to think about. What’s it going to look like in 10 years. If I don’t save now or if I do save, what’s it going to look like? If I go buy that second vacation home now instead of waiting, how’s that going to affect me? So, all those questions need to be answered and that’s what we do as financial advisors. Mary Jo: Well, true. And even as financial advisors, we have questions. It’s true for all of us. Investment management gets all the glory, it seems like, when you’re talking about wealth management. People tend to focus on their investments. That’s why I say it gets all the glory because it’s the thing that’s talked about the most. Bob: You’re absolutely right. I mean, it’s always the number one thing first, but it’s the planning that’s so important. You have a saying, you might say it later in the program today, but “You can’t invest your way to wealth. You need to save your way to wealth.” Is that how you say it? Mary Jo: Yeah, that’s exactly true. So it’s the ongoing relationship between your investments and planning for the future where the magic happens. Bob: It really does. I mean, planning is what tells the entire story, and it’s a lifelong process that you don’t just start in your 30s and then quit. That planning process goes to the day you die, even if you live to 90 years old, and you really need to understand your entire financial picture in order to achieve those financial goals you want and those dreams that you’re thinking about. It really gets down to starting with those goals and what are your goals and putting that into the financial planning process. Mary Jo: There are a lot of subtopics that should be covered as part of the planning process, but it all really leads to the same place. Can you achieve your goals? What does that look like financially? And what if the unexpected happens? At Christian Financial Advisors®, we utilize a living, breathing, interactive planning process. Our wealth management technology keeps planning as the foundation for the clients’ experience. We just think that it’s so critical to the overall wealth management process. Bob: It’s true, and our clients love this because it’s like a living, breathing document that we now do our financial plans in the cloud. It promotes that collaboration between us and them. We really believe around here that financial decisions should never be made, and they can’t be made, in a vacuum. In order to accurately plan for that future, you’ve got to look at the entire financial picture. What’s your balance sheet? What’s all the moving pieces and parts? And how’s that all fit together in a financial planning process? Mary Jo: You know, Bob, the financial planning process, it’s really just a communication process between us and our clients. It allows us to see how they’re progressing along the path toward their goals, and then we can react accordingly. So, all of the elements regarding your entire financial picture are really just levers, and we can move those levers one way or the other, and see how these changes affect the outcome. Bob: So, in helping our podcast listeners today, the first thing that you want to do when you’re planning for those what-ifs or whens is just look at your base facts, just the nuts and bolts of a financial plan. It’s all your sources of income and then your outflow, so you have your income and your outflow, your expense, and then your liabilities, what you owe in loans on your mortgage and maybe your vehicles, if there’s any credit card debt. Then we look at what are your insurance benefits? What kind of life insurance do you have? Let’s look next at taxes and how’s your income affecting your taxes. These are some of these base facts and then your current investments as well as planned savings. Mary Jo: So once we have all this information, we’re basically setting a baseline. It’s a static, one-time look at the future, and then we can make projections and estimates based on lots of random sampling, but it’s all still just a guesstimate because you’ve got what we call Monte Carlo Simulations working there. Think of it like a gerbil running on a treadmill, and they’re just doing it thousands and thousands and thousands of times. We’re doing our best thinking, but it is a guesstimate, so that’s why we want to continually review that. Bob: So, we’ve got all these facts in there that we’ve talked about. And like you said, it’s looking at all those random things that can happen. Then we look at a wishlist item, like planning for those contingencies, and we plan for those in advance even if they don’t actually happen. We’re able to do that through our computer simulation. In this type of interactive planning, it helps our clients know what’s possible and what’s a financial stretch and if they can make it. It helps them make those decisions with confidence, and it shows them what the outcomes can be so they can actually live life and not worry about it so much. Mary Jo: The real fun comes when we help them dream. We help them see the big picture and realize there may be plenty of room to buy that beach house and make plans for that extended mission trip or give generously to the building fund at their church. In my previous life as an advisor, a lot of my clients were college professors. One of their biggest dreams and goals was to be able to give to their alma maters. Let’s just say they were a professor of economics. They wanted to endow a chair in the school of economics. Maybe that’s something that’s a goal for you, and you want to be able to do that. Maybe you can afford to do more than you thought. Together we look at what’s possible. Bob: Yeah, you know, Mary Jo, it’s interesting when we look at these what if and whens, just in the last couple of months we’ve had an individual that wanted to buy a $50,000 tractor. That can really cause a stress crack, what we call, in their financial plan, and we had to ask, “Is this really necessary? Or is this a business venture that you’re going to do?” We looked at that $50,000 tractor and pulling that money out of their plan and what would that $50,000 tractor really cost because that $50,000 is no longer growing for you, so the cost of that $50,000 tractor over the next 30 years because now that 50,000 is not growing for you was well over $200,000. That can hit a major crack in your financial plan. But in some cases, it may not. So we’ve got to look at things like that or buying that beach house that you just mentioned or taking that big vacation with your family or that mission trip, all that needs to be looked at. With today’s technology, we can put scenarios in, and you can watch the lines move up and down how that’s going to affect you in the long run. Should you pay now or pay later? It’s really amazing to watch it move. Mary Jo: You know, Bob, why is it that since you’re building a house, all your analogies have to do with building, so you’re talking about stress cracks? Bob: I know. I know. I think that’s … I’m in that- Mary Jo: You’re in that mode. Bob: Everybody’s going to want to come see my house now in a couple of months. It’s not quite ready yet. Mary Jo: And you know, as you were talking about that, my husband and I are wanting to buy or thinking seriously about buying an RV, a motor home, or something and, so I’m like, “Oh gosh, is that going to create a stress crack in my plan?” But I think we’ve thought it through. The other things you want to think about, can you plan for early retirement? You want to have financial independence, so when can I retire? When can I start that business that I want to start? Can I buy a new car? We always want to plan on that every four to five years, so we build that into the plan. What’s your plan for longterm care? Can you afford to buy longterm care insurance? Or should you self-insure? Maybe you’ve got sufficient assets to make that happen. What if there is another type of unexpected health event like one of you gets cancer or something along the line? Maybe you want to treat the entire family to a Disney vacation. Is that a reasonable goal? So, planning emergencies. You know there really is no such thing. Before we get too far along, I just want to take a step back and talk about planning for emergencies. You have to assume there will be emergencies and plan for them, thus the ever-present, ever recommended emergency fund. So, you’re in your 20s and 30s. This needs to cover unexpected expenses like maybe an emergency room visit for the kids. One of them falls out of the tree fort and breaks their arm. I hope that doesn’t happen, but it does. And in your 40s, it’s typically a new car or household repairs or maybe you want to consider putting in that swimming pool. And in your 50s, it’s generally about unexpected layoffs or the loss of a job and the risk of that, so the older you get, the more you earn, the longer it takes to replace it. Bob: We don’t mean to be scaring you all so much, it’s just we want to emphasis it’s good to plan for these what-ifs and whens. Another thing is those market fluctuations that come along, which none of us can control. Contrary to popular belief, your investment advisor does not control the stock market. Mary Jo: This is so true. Bob: But you can plan for these market fluctuations by having enough funds outside of the market to last for four or five years while you wait for those markets to rebound. That’s the key to it. You remember back in 2008 when we had this huge downturn, it took about five years for the market to get back to where it was before that downturn. But if you had enough funds outside of the market, you’re fine. So, there’s all these different things that it’s good to look at, and we can explore those choices. Even things like if you want to retire now, can you? Or maybe you could if you spent less. Or if you’re saving for retirement, should you save more? Should you work longer? These are all levers that can be pulled, but you can look at that in advance. Mary Jo: So, speaking of the stress test, increasing the return on your portfolio, that’s another lever we can use. It’s really a lever we don’t have a lot of control over. It can require more risk if you want to increase the return on your portfolio, but we can model this and stress test the portfolio and see how it could change your probability of success and look at the what-ifs if you get an 8% return over 6% return, or what happens if your return is only 4%, so it’s another way we can kind of see what happens. Bob: Yeah, and you know, Mary Jo, there’s another type of planning that we look at. It’s called scenario planning because these are things that you can control. It’s not like the market that you can’t. Scenario planning allows for a full, what we call, open architectural planning, and in most cases, a scenario is within the client’s control. Mary Jo: So, common scenarios include spending or saving. They’re typically buying or selling. You’re downsizing a home. You’re selling the big house, buying a smaller one. You’re increasing your expenses or reducing your expenses. You’re spending less. You buying life insurance, disability insurance or longterm insurance, that all is an expense. You’re adjusting one side of the ledger or the other, so it’s like your accounting process. You’re rebalancing your portfolios or illustrating various retirement changes. Your base facts don’t change, but you can illustrate what the outcome would be if the other facts change. What if you want to sell your business, or you’re adding an additional source of income, how does that play out into your financial future? Bob: Other scenarios that we can plan for and help you do that is planning for a premature death of a spouse. We’ve seen that happen. We never want that to happen, but we’ve had that happen quite a bit. You can do that through estate planning. How would you live without your spouse? Be careful of getting those calls from financial advisors trying to sell annuities because they sure do do that a lot when this type of thing happens. Mary Jo: You know, Bob, that is so true. We’re thinking of having a future podcast episode and talking a lot about this. I was just reading a book for widows. Now, I just think that every woman ought to read that before they become a widow so that they’re planning for it instead of reacting to it. So, good point. Planning for future purchases, so you maybe want to start a car buying fund or a beach house fund. How long will it take to save? And what impact does that have on your other longterm goals? Bob: Like I was mentioning, there’s those what-ifs that are out of your control. We mentioned that premature death but also think about disability. What if that occurred? Or bear markets? Those things come along, and we’ll have a bear market, especially if that happens during retirement, and it’s going to happen because bear markets do happen on average every three to five years. You’ve got to really look at that and figure out the sequence of returns and what those biggest risk factors that a retiree faces. Mary Jo: So, today’s planning tools allow for even more interactive communication between us as advisors and our clients. We can even simulate multiple scenarios if we want to and look at all the possible what-ifs. We work side-by-side with you to understand the financial impact that your decisions have on your plans. We can adjust scenarios and techniques in real-time to get your immediate reaction and your feedback and say, “Oh, I don’t like that,” or “Oh, gosh, that’s not what I’m looking for.” So, that’s what we mean by a living and breathing versus the old school way of planning that puts a binder on a shelf, and it just sits stagnate. It stays there, and you never revisit again. Bob: You can put all this on an app on your phone and just look at any time, 24/7. You can pull it up and see how did this affect me? Mary Jo: Absolutely. Bob: And what just happened? There’s also the collaboration on estate planning that will show you the risk and vulnerabilities and benefits of different types of estate planning scenarios that we can look into your plan and work together to create strategies that protect that legacy that you want to leave. Mary Jo: We want to have ongoing monitoring of these plans. We want to adapt them as your needs evolve. As clients’ finances mature, you want to continue to meet your planning needs. Bob: So there you have it. There’s the planning for the what if and whens on today’s podcast, and we want to help you with that. As your life evolves and your situation changes, we want to continue to walk beside you in this, change those levers with known outcomes as life events happen because it’s a process and not a one-time event. If you’d like us to walk beside you during that, give us a call at 830-609-6986 or look us up on the web at ciswealth.com [CONCLUSION] You’re listening to Christian Financial Perspectives. Join us next week as we explore what God’s word says about money. Don’t forget, you can sign up for our free newsletter on ciswealht.com or give us a call at 877-71-TRUTH. That’s 877-718-7884. To make sure that you don’t miss any of our podcasts regarding the truth about money, make sure to subscribe to Christian Financial Perspectives at christianfinancialpodcast.com for free. If there are any specific topics you would like to hear more about, we would love to hear from you. That’s all for now, until next week! [DISCLOSURES] Comments from today’s show are for informational purposes only and not to be considered investment advice or recommendations to buy or sell any company that may have been mentioned or discussed. The opinions expressed are solely those of the hosts, Bob Barber and Mary Jo Lyons. Bob and Mary Jo do not provide tax advice and encourage you to seek guidance from a tax professional. Investment advisory services offered through Christian Investment Advisors Inc. DBA Christian Financial Advisors®, a registered investment advisor.