ADJUSTING TO NEW REALITIES.

My Outdoor Home.

It's Been a Tough Year For A Lot of Us. With the year drawing to a close, it's time to begin planning for next year. Taking a look at our assets, we often overlook the most important one: The ability to generate income. Over the past five years, I have often written of the plight of those who have undergone a big shift in their income due to job loss. Most of my clients have been high earners over the years and most of those who have lost jobs have found the adjustment quite difficult. The biggest problem is that re-entry into their previously high-paid career is virtually impossible. I have always recommended that high earning clients recognize that their biggest risk is the possibility of loss of high employment income. In previous years, many of those have told me that they were somewhat "bullet proof" in this regard. This attitude no longer prevails and the need for security is replacing the desire for luxury as paramount in the mind of pre-retirement clients. Talk show host, David Ramsey has developed a large following among those who agree with his slogan that "A free and clear house has replaced a BMW in the driveway as the most desired status symbol". I'm not sure that this statement fits everyone but does appear that it fits a lot of those who find that they can no longer keep up with the expense of making large monthly payments on luxury items they wish they no longer owned. A very wise client of mine once said "You can always trade money for stuff but it is much more difficult to trade stuff for money."

Now Is A Good Time To Evaluate Your Strategy. At this point, I am talking to highly compensated individuals who are still employed. Those who have lost jobs are not without hope but will require a different strategy. If you still have a job, even if you think you are secure, ask yourself what you would do if that income were to suddenly end. There is no "one size fits all" strategy, I can give you a few ideas but they may not fit your situation. The best thing you can do is spend some time with a spiral notebook and brainstorm the possibilities. Here are some common problems.

1. Benefits. How will you replace your health insurance? Will your family be vulnerable without your company paid life insurance. Are you insurable? You may not have disability insurance if you are no longer employed and it will be difficult to purchase if you are not.

2. Liquidity. If you don't have adequate investment income to pay your monthly expenses, you will need to have some assets that you can liquidate to cover these expenses. This could present a problem for many of those who liquidated their investment portfolio to purchase one of the annuity products that promises a guaranteed minimum return with some upside if the stock market does well. Without commenting on the merits of this investment, I can almost guarantee that withdrawal before the maturity date will involve a substantial withdrawal penalty. While you can always withdraw from a qualified plan such as a 401-k or profit sharing plan, you will have to pay a penalty if you need a substantial sum. It may be preferable to live on credit cards at the end of the year in order to push the income into next year when your overall income will probably be less. The bottom line is that adequate liquidity is your most important insurance against financial disaster. Guard your liquidity reserves with your life.

3. Debt Service. It is probably inadvisable to liquidate your qualified plan assets and pay a penalty to pay off debt but you need to look at ways to manage this debt. If you were one of those who took out a 15-year loan to get a lower interest rate, perhaps you might prefer lower payments. Even if you get a slightly higher interest rate, you definitely lower your risk by taking out a 30-year loan as opposed to a 15. I have seen more people in trouble because their payments were too high than due to a longer payoff period.

4. Develop New Skills. Consider ways to develop new skills. Look at ways to develop other marketable skills. Not only can it help you stay employed at your current employer it could provide ways to generate earned income if you do become unemployed.

Parting Shots. These are just a few points to consider. More than anyone else, you are in a position to look at the risks you face and develop a plan to deal with them. Can't say I'm making much progress towards my health goals. Will talk more about them next week.