How a Financial Plan Prepares You for Good Times … and Bad

Peter Richardson, CFP®, CFA, is the vice president of Planning Excellence at Northwestern Mutual.

When we talk about financial planning, we usually talk about fun stuff: buying a home (or renovating one), that bucket-list vacation, paying for college and retiring when you want without having to worry about paying for it. And while we’d love to focus on the fun all day long, the reality is a financial plan isn’t just about sunshine and rainbows. Our job is to listen to your hopes and dreams in life and to create a roadmap to get you there … even if there are bumps, twists and turns along the path.

Today’s market volatility, inflation and talk of recession can be unsettling. It’s natural to worry about your investments and your ability to reach your goals. Maybe you’re worried about your business or your job. While the head-spinning news cycle has raised the level of anxiety for many, it also serves as a good reminder that these are times a comprehensive financial plan is designed to address.

Dealing with a market decline

Markets have dropped significantly this year. It’s not easy to watch the value of your investments fall. While it’s impossible to predict exactly when the markets will rise and fall, we know it will happen — and we plan for it. A financial plan is designed to help you weather swings in the market like we’re seeing today by 1) helping you understand the purpose of your assets in your plan and 2) suggesting the right types of assets, such as stocks and bonds.

When developing an asset mix, a robust planning process examines the risks of volatility to your plan using Monte Carlo simulation, which examines hundreds of possible paths for the markets. In other words, the reality of bad news is already built into the plan; so when turbulence arrives, it shouldn’t derail you from reaching your financial goals.

If your investments are for a goal that’s still many years away, the plan may be to simply ride out the decline and wait for markets to regain their value — throughout history, they always have. If you’re in a situation in which you need funds for a goal in the near or mid-term, a financial plan should include a range of financial options that reinforce each other. These options should include ways to access liquidity without having to sell investments that have lost value. A cash reserve might include short-term bonds, savings accounts, money market funds or permanent life insurance cash value . In some instances, an annuity may also be part of the mix to provide a regular cash flow that is not affected by ups and downs in the market.

This is where our approach to financial planning really shines. The additional options we often include in our plans are designed to give you flexibility to meet your goals even though the markets and economy are slowing. Hopefully, it helps to reduce the anxiety you may otherwise feel at a time like this.

Planning for other bumps along the journey

Market volatility and recessions are bumps we plan for. While we don’t know when they will happen, we know they will at some point, so our advisors will include strategies in plans to help prepare for these events and the financial implications they may have for you.

There are any number of other known risks along your journey, from unexpected expenses to the possibility that you or your spouse will be unable to work due to disability or, God forbid, die early. Financial planning is about creating a roadmap to reach your goals while also addressing the risks that could stand in the way.

Why planning for risks matters

Any investment or financial plan is likely to include a level of risk management. But the best planning focuses on it. That’s because true wealth is often gained during bad times, not good ones. Those who sell stocks during a downturn lock in losses. People who are forced to go into debt to pay for an unexpected expense may rack up additional costs in interest payments versus people who have other sources they can tap to cover an emergency expense.

In retirement, knowing that you have an emergency cash reserve, permanent life insurance cash value (which doesn’t rise and fall with the markets) and (if you’re in retirement) steady income from an annuity means that you can ride out temporary dips in the stock market. Not only does a balanced approach provide peace of mind, a recent study has shown that it makes a positive impact on long-term results.

Your financial plan will change, but based on your goals

A financial plan is built to be flexible so that it can change over time as your goals evolve. The flexibility is also how you deal with unexpected events or market downturns. If you have a solid plan, you should feel confident that you’re on track to do the things you want in life — despite what’s happening in the market. If you don’t have a plan, or if you’re concerned that your plan hasn’t fully prepared you for a situation like today, this is a good opportunity to reach out to a Northwestern Mutual financial advisor to get a plan that prepares you to achieve your goals in any economic season.

All investments carry some level of risk including the potential loss of all money invested. Past performance is no guarantee of future performance. No investment strategy can guarantee a profit or protect against loss. The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement income will reduce the death benefit and may affect other aspects of the policy.