Risk Management and Financial Planning Go Hand-In-Hand

Risk is an inherent part of daily life, whether it is hitting someone with your car on the way to work, being diagnosed with a terminal illness or losing your house in a flood. Risk can be defined as an exposure to danger that, as a result, threatens your property/assets, your ability to generate income or your life.

Risk management is the process of identifying these risks and addressing and/or managing them in an appropriate and responsible manner. The four ways of addressing risks are:

  • Elimination: Eliminating risk means the total avoidance of certain risky activities or circumstances. For example, you can eliminate the risk of losing your house to a landslide by not buying a house on a hill. Elimination is the simplest, most cost-effective way to manage risk.
  • Reduction: Another simple and cost-effective way to reduce risk is by merely changing certain habits or circumstances. An example of reducing your risk is installing smoke detectors in your home. It won’t preclude you from having a house fire, but it does lower the risk of losing your home (and your life) in case of a fire.
  • Retention/Acceptance: The risk you retain is the risk you are willing to accept. You may choose not to get collision insurance on an old car because the cost of the insurance premiums is greater than the value of the vehicle. In this case, you are accepting the risk of total loss in case of a car accident.
  • Insurance: Insuring against risk provides a great hedge when a risk (or loss) comes to fruition. Quite simply, one can think of this method as pooling your risk with a large group of people and sharing the burden. Is it pricey? Potentially so, however, have you ever heard of someone regretting having insurance in place when the insurance provided a timely financial resource when a loss occurred?

Financial planning provides the perfect platform for the identification and adoption of proper risk management strategies. The establishment of your financial needs and goals in conjunction with an analysis of your current and future cash flows, asset base and wealth transfer strategy(ies) provides vital information and insight. This information can then be used to assign a monetary value to current/future assets, income loss due to disability, asset spend-down due to a long-term care event and income production due to loss of life. At this point, effective risk management strategies can be analyzed and implemented in the most cost-efficient and effective manner.

To summarize, to manage your risk properly, you first must understand what risks exist and the four ways to manage such risks. Comprehensive financial planning provides the foundation you need to decide which risk management strategy would be most effective for each potential risk. After you’ve eliminated, reduced and accepted some risk, in order to protect yourself, your assets and your family, it is vital to insure against the “accepted” risk(s). Always remember, anything worth earning and anyone worth loving is worth protecting.

Retirement Savings – How Much is Enough

As a Financial/Retirement Planner, the two most common questions I am asked are, “How much should I have saved so far for retirement?” and “Do I have enough to retire?” While so many advisors, media personalities, scholars, etc. attempt to develop formulas to answer these questions, the reality is the questions are quite simply too difficult to answer utilizing these generic “one rule fits all” approaches.

Saving for retirement can feel like running a marathon without a finish line – a constant and tiring struggle. Lacking a preretirement savings objective can make it difficult to set up a realistic savings plan, determine a retirement budget or even accurately manage your retirement investments. Yet, fewer than half of Americans reported that they or their spouse have tried to predict how much money they will need for retirement, according to the Employee Benefit Research Institute’s (EBRI) 2013 Retirement Confidence Survey. Continue reading “Retirement Savings – How Much is Enough”

The Value of Professional Financial Planning

When you think of all of the ways it affects your life, it’s no wonder that money consistently ranks as one of the leading causes of stress for Americans. In the day-to-day, you might have to worry about an upcoming loan payment or an overdue credit card bill, while in the long term many people struggle to balance retirement savings with a child’s education fund and an underperforming investment portfolio. Financial planning is a complicated balancing act, and it can be difficult to manage on your own. Continue reading “The Value of Professional Financial Planning”