By Dennis G. Visser / Guest Column
Some of us in Eastern Iowa work in industries that go up and go down fairly consistently. The high points are pure bliss, but for some, the low points can be unforeseen and unnerving. Whether working in education, engineering, agriculture or elsewhere, fluctuations in any sector can be a significant risk to a person’s retirement plan. The key is to address it, plan for it and take action to meet the challenge.
I recommend these three strategies to clients to help endure the financial impact of a layoff:
1. Always diversify. As part of a comprehensive financial plan, built with both investments to grow wealth for tomorrow and insurance to protect what matters today, diversification is key. The most important message that we deliver to our clients working in volatile industries, both in good times and bad, is the power of diversification when investing.
Over the last decade, several large Eastern Iowa employers have cut jobs. Many of these employees have owned quite a bit of company stock. Some of them had their entire financial livelihood tied into the company (salary, bonus, benefits, company stock and more). If that sounds like you, you may want to diversify in other areas to reduce exposure. I especially stress having exposure in asset classes that have non-correlating relationships with one another.
2. Always plan long-term. In those moments of uncertainty, it’s important for all of us to review our client’s financial plans and not overreact. It is a human tendency to think that when things are going well, it is going to last forever. The opposite is also true. Many times people think that when things are going poorly that it, too, will last forever. The key is to create plans that make sense in any market environment, and stay the course.
Before volatile times arrive, it’s smart to get back to the basics. As part of long-term planning, I encourage clients to maintain their insurance coverage to protect them from further risks. And I ask them to resist the urge to raid their retirement funds. No one wants a short-term market fluctuation to affect the success of their long-term plans.
To prevent a bad situation from getting worse, I encourage clients to review the strength of their emergency funds. In the event of a layoff or a salary freeze, those cash reserves can help people weather a storm without greatly impacting their lifestyle. Most experts recommend setting aside savings for 3-6 months’ worth of expenses. Keep in mind that a layoff may grow your expenses as you lose health care benefits, life insurance benefits and more.
In a layoff, the key is to have sufficient liquidity – access to cash or cash values built up in a permanent life insurance policy. Permanent life insurance can help provide funds to cover expenses in two different ways. First, owning a permanent life insurance policy can help ensure that if anything were to happen to you, your goals could still be met. Second, permanent life insurance lets you build up cash value that can be used via withdrawals or loans to help fund unexpected expenses. The cash value of the policy grows tax-free, and generally may be withdrawn tax- and penalty-free up to the amount of premiums paid.
3. Always see the full picture. One of today’s biggest myths is that people can invest their way to financial security in retirement. This incomplete approach, focused only on stocks and investing, has created a gap that’s resulted in millions living with anxiety or a false sense of security. What happens if the unexpected occurs? A grant funding your project expires? A layoff? A disability? The unexpected passing of a loved one? I urge people to close the gap and build a full picture financial plan – one that integrates a solid budget, investments to grow wealth and risk protection products to help defend what matters most. When you replace vulnerability and doubt with confidence, that’s when you can live life differently.
Dennis G. Visser is a Northwestern Mutual financial advisor and licensed insurance agent based in Coralville. Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, WI, and its subsidiaries.