Published in the Baltimore Business Journal on December 4, 2020
Back in January, before the Covid-19 pandemic swept the globe and altered our way of life, our team of financial advisers met with two of our clients, a married couple on the brink of retirement.
They spoke enthusiastically about two events they were looking forward to in their first year of retirement: an international vacation they had been planning for the past 10 years, and their daughter’s wedding in the spring. Our conversation ranged from the financial costs to a much more heartwarming discussion about their dreams becoming a reality.
Fast forward to mid-March and suddenly everything changed: The stock market was in a tailspin and boarding an airplane was out of the question. Like so many others, Covid-19 caused our clients' retirement plans to change right out of the gate. But did it fundamentally alter their retirement plan as a whole? In other words, have the events of 2020 redefined how we plan for retirement?
Planning for the known knowns, known unknowns, and the unknown unknowns
At a news briefing in 2002, in reference to the limitations of intelligence reports, Secretary of Defense Donald Rumsfeld explained, “There are known knowns. There are things we know we know. We also know there are known unknowns. That is to say, we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know.”
Luckily, this adage applies nicely to the question we have posed — have the “unprecedented” events, the unknown unknowns of this year altered the way we approach retirement planning? Quite frankly, our answer is no. If anything, 2020 has underscored the same retirement planning principles we have adhered to for years:
Retirement plans change
Retirement plans should be dynamic, not static. From a retirement planning perspective, you need to include all of the known knowns — such as the amount you have saved for retirement — in your financial plan. You also need to account for the what-ifs — the known unknowns — like periodic market downturns. If your financial plan incorporates those elements, you will be better prepared for unforeseen external circumstances like a pandemic.
Not only do you need to be able to adapt to external factors, you also need to acknowledge that your tastes and interests may change. Overall, the goal is to build a financial plan that is flexible and adaptable.
There are always going to be unknown unknowns. Covid-19 isn’t the first.
None of us could have foreseen the events of 2020. If you would have told someone last year that a pandemic would spur the quickest bear market in history and we’d all be quarantined in our homes for months on end, you might have been laughed out of the room. Covid-19 is not the first unknown unknown that has forced pre-retirees and current retirees to alter their lifestyle, and it will not be the last. Rather, the events of this year should serve as a reminder of the importance of good financial planning.
Do your best to account for the known unknowns.
This year validated the importance of creating a flexible retirement plan so that it can adapt to life’s obstacles. To prepare for these hurdles, ask yourself some of the following questions: Do you have multiple income streams? Are your investments allocated so short-term resources are more conservatively positioned compared to longer-term investments or assets earmarked for generational wealth transfer? Do you have the proper insurance policies in place? Do you have backup plans for how you will spend your time?
Remember our clients from January? Well, in July we met again to check in and were pleased to learn that even though they were unable to take their international vacation and their daughter’s wedding was postponed, they took a two-week RV trip and are having Sunday night Zoom “dates” with family. Although specific events in their plans changed, their overall plans didn’t come to a dead end; they just took a detour.
With so many factors that can affect your personal or financial life at any moment, you need an experienced navigator and the right safety nets in place to protect yourself, your family and your ability to eventually leave the workforce. Even if you don’t have a plan in place now, it’s never too late to build one. The sooner you start, the better.