Financial resilience: Important questions to ask your financial advisor

By Katie Rosseel | Citizens Contributor

If we’ve learned anything from living through unpredictable events, it’s that we need to be prepared for both the expected and the unexpected. Resiliency is critical to being able to ride out the turbulent times.

To achieve that resiliency with your finances, you need an experienced advisor on your team. Think of this advisor as the coach in your corner. They keep you on track, and help you course-correct, to ensure that you can still reach your goals despite whatever hurdles life throws you.

Knowing the right questions to ask during discussions with your financial advisor is the key to getting to the heart of what you need to do to ride out any turbulent times. Here are the top discussion points to bring to the table:

As life changes and markets fluctuate, so do the risks that you are willing to stomach. Like other life events, personal crises and wide-spread emergencies can catalyze changes in an investment strategy. Your financial advisor can help you rebalance and reallocate your portfolio.

Your financial risk tolerance also comes into play. High tolerance means you’re willing to stomach big market swings in return for a higher potential return on investment in the long term. Low tolerance is taking a more conservative approach, avoiding wild fluctuations in exchange for steadier returns.

Your financial advisor can discuss the factors that go into determining your risk tolerance, but some general principles apply. If you’re within 10 years of retirement or anticipating a big expense in the next few years, such as paying for college or buying a home, you may want to adopt a lower-risk approach to investing. If retirement is 10 or 20 years away, you have time to accept short-term instability for long-term gains.

While an abundance of caution can protect you, being overly cautious can also hold you back from reaching your goals. Regardless of how frightening the market’s response to an emergency situation may feel in the moment, the market will correct and recover over time. How do you strike a balance? The key is to not react out of emotion. Instead, it’s a better idea to reach out to a trusted financial advisor who can help you weigh the options.

The key to weathering emergencies is contingency planning, which creates a safety net that can cover a variety of emergency scenarios.

First, lay the groundwork with an emergency fund. This should be enough to pay for your expenses over an extended period. Three to six months will give you a comfortable cushion, but more is always better. Six to 12 months will give you the strongest buffer against these unforeseen events.

On top of that, there are specific steps you can take to prepare for the most likely emergency scenarios:

Job loss

That emergency fund will go a long way in supplementing your unemployment insurance to smooth your transition to another job, but there are a few precautions to take that will make the experience easier to endure. Check your insurance policies for riders that waive premiums in the event of unemployment. If you own your home, ask your financial advisor about applying for a home equity line of credit to use as a “last resort” source of funds. Finally, in the event of job loss, budget for your taxes up-front so that you don’t get hit with a tax bill you can’t pay.

Disability

A sudden disability can be hard to prepare for, but there are ways to mitigate the risk to your financial health. Disability insurance pays you a percentage of your income in the event that you become ill or injured. If your employer doesn’t provide it, you can still purchase it individually.

Long-term care insurance may be an important companion to your health insurance in case you are unable to care for yourself. (This is generally defined as being unable to perform two or more activities of daily living, including bathing, dressing, eating, grooming, using the bathroom, getting up, and walking.)

In the event of a disability, take the time to explore additional sources of income that might be available to you, including Social Security Disability Insurance and Workers’ Compensation. Your financial advisor can help you maximize these benefits.

Social Security Disability Insurance is a monthly benefit available to those who have an injury or an ailment that is expected to last at least one year or result in death. It’s available to eligible Americans of any age and income level that have been left unable to work by their disability.

If you were injured on the job, you may be entitled to Workers’ Compensation. This can help pay for medical care and rehabilitation for your injury. Keep in mind that accepting this benefit generally comes with the requirement that you waive the right to sue your employer for negligence.

Death of a loved one

The loss of a loved one can be one of the most difficult personal experiences, but there are ways to mitigate the financial complications that loss may represent, so you have the space you need to grieve.

Life insurance provides financial protection to a beneficiary, such as a spouse, in the event of the policy-holder’s death. This type of insurance can help cover many expenses, including lost income, mortgage payments, or the cost of a funeral, for example.

Burial insurance is often easier to qualify for than life insurance and is more affordable. It tends to offer a smaller death benefit that is marketed to cover funeral expenses but can still be spent on any costs incurred by the beneficiary.

End-of-life care may be a significant cost to those caring for a terminal loved one without insurance. In addition to providing for care of those who need help with everyday tasks, long-term care insurance can also help to defray the costs of hospice and other end-of-life expenses.

When illness and injury strike, the costs of caring for yourself and your loved ones can stack up.  Whether you’re recovering from an illness or preparing for the chance of future medical emergencies, your financial advisor can help you mitigate the costs.

Contributing to your health savings account can help offset the cost of healthcare. Your contributions to this account are tax-deductible, and both your earnings and qualified withdrawals from the account go untaxed as well.

To ensure that you have the money you need when you need it, you could also prepare for expected medical expenses by earmarking certain assets to cover those costs in advance. Putting this money into a low risk, high-yield savings account, or certificate of deposit, within a Member FDIC institution can keep it safe. (Of course the lower the risk, the lower the growth.)

As mentioned earlier, long-term care insurance can help offset the potential costs of this kind of care in retirement. While this type of insurance ensures you’ll be cared for indefinitely, plans with unlimited benefits are incredibly expensive. However, there are more affordable plans that limit coverage to a set period of time, usually ranging from two to five years.

Knowing your finances, your advisor will be well-positioned to provide you with the best advice on how to invest in your future health.

Some emergencies can drag on long enough to drain your safety net and you may have to dip into other accounts to make up the difference. If you have to withdraw money to deal with a crisis or other life event, your financial advisor can help you determine where to draw from and a plan to get back on track.

You may be able to reallocate your portfolio to achieve a better rate of return to make up for the loss. However, as you get back on your feet, you may need to look at reducing your current expenses to redirect that money towards your retirement.

Just as your financial plan should evolve over time, your goals should change with your circumstances as well. You may find that your retirement goals need to be reassessed to bring them in line with what you can afford. Be honest with your advisor and yourself about what you truly need for a comfortable retirement.

In an emergency, any extra money helps. Although Citizens’ Financial Advisors are not tax experts or CPAs, there are certain ways they may be able to assist you. Here are a few:

Tax-loss harvesting is an investment strategy that could help to lower your capital gains tax liability. It achieves this by selling off investments with an unrealized loss, providing a credit against the realized gains of the portfolio. This asset is then replaced with another with a similar risk and return, or the investor can wait 30 days and repurchase the original.

You can also minimize your taxable income by contributing to your 401(k). This means less money in your pocket today, but more in retirement. This will only help if you have a traditional 401(k) account. Like a Roth IRA, Roth 401(k) contributions are still taxable, but future withdrawals will go untaxed.

The difference in these two styles of tax-advantaged accounts can be used to your advantage. By converting a large, traditional IRA to a Roth IRA, you could mitigate a certain amount of tax in retirement. However, you will be taxed on the gains of that traditional IRA and the income taxes you deferred.

Municipal bonds offer a tax-free investment opportunity, at least at the federal level. These debt securities are issued by state, city, and county governments to raise funds for public works and other expenditures. States may tax your capital gains from these investments, but your financial advisor can help you work through the tax implications of this investment before you pursue this strategy.

There are many options to tailor your investment strategy to reduce your tax bill based on your personal situation. Your financial advisor is an excellent resource to help you figure out the best path to take.

For example, while it’s impossible to predict the future, turbulent times can be a chance to pick up undervalued stocks with solid fundamentals that will grow as the market recovers.

Your advisor can answer these and many other questions, tailored to your personal needs and goals. They will coach you through the hard times and help you take advantage of the good. Learn more about financial planning with Citizens and connect with a Citizens Financial Advisor.