Not that long ago, many people equated more risk with higher return and were comfortable going after it. The past year reminded us that risk has a down side. As we look at reaching financial goals, it's important to understand how managing risk can actually improve our future position.
Protect Against Risk to Income and Assets
A recent article in Medical Economics magazine documents how large banks, government employees and even Federal Reserve Chairman Ben Bernanke invest their assets in fixed-income life insurance and annuity contracts with guaranteed return. In a down economy, they manage the risk of potential losses by choosing stable investments.
Individuals need to manage risk in two areas — risks to income and risks to assets. Protecting your income is critical to achieving your financial goals, as is being prepared for risks to those assets such as changes in your career, health of you or a family member, and your investment portfolio.
When you add in the projections for longer life expectancy and the increasing need to self-fund retirement, it is clear that managing risk must be the foundation of any financial plan. Your financial representative can guide you in creating your personal risk management strategy. Here are some areas to consider:
Risk: Premature death. Beyond the emotional toll, the death of a wage earner can result in outstanding bills, taxes and monetary challenges for the family. Life insurance benefits fund goals such as children's college education or health care and retirement expenses for the surviving spouse. Permanent life insurance builds cash value that can be leveraged throughout life; its tax-free death benefit can cover estate taxes, continue a family business, or make charitable contributions. Evaluate your life insurance needs with our calculator.
Risk: Illness or injury leaves you unable to work. Your ability to earn income is your biggest asset between ages 25 and 65, as it pays monthly expenses and funds your savings for the future. Disability income insurance replaces essential income if you become disabled and unable to work. An individual disability policy is best because it belongs to you, not your employer. Estimate the right amount of disability insurance for you using our calculator.
Risk: Unexpected expenses. Financial surprises can add debt and divert dollars from the consistent savings that you need to meet your goals. Have an emergency fund to cover at least three months (and preferably six months) of essential expenses so your budget can handle unexpected events such as job loss, medical issues, home or auto repairs or other emergencies. Build this fund automatically through a payroll deduction and increase the savings amount to include pay raises when you receive them.
Risk: Long-term care. Americans have more than a 70% chance of needing some form of long-term care after age 651. A long-term care event can affect even substantial retirement or emergency funds, so be sure to accommodate that risk within your financial plan. Refer to our 2008 Cost of Long Term Care Study to help you understand rates in your area.
Risk: Market volatility. Participating in the stock market has both growth potential and risk, and smart investors rely on a well-diversified portfolio of investments to protect themselves. Your financial representative can help you identify options within and outside the markets and determine the best choice for your specific situation.
Understanding and managing risk is the essential foundation to any effective financial plan. Your financial representative and Northwestern Mutual's holistic planning process will help you to evaluate your specific situation and decide the best approach for your family's specific needs.