(TNS)—Great financial planning requires you to employ two contrasting skills: Focus intently on your end objective, whether a comfortable retirement or a certain net worth; yet remain flexible for the inevitable bumps in the road. How can you balance the two? What financial tools can help you most?
Reflecting on the spring holidays, I remember when Indiana, where I live, suffered the deadly Palm Sunday tornadoes of 1965. In less than half a day dozens of twisters devastated Indiana, Illinois, Iowa, Michigan, Ohio and Wisconsin, costing 271 lives and injuring more than 1,500.
While recovery professionals can measure the dollar cost of putting structures back together and insurance companies can talk about claims paid, it’s much harder for us to measure the ongoing financial aftermath on survivors.
Price tags of displacement after the tornadoes were both emotional and economic: Some survivors endured loss of jobs; others incurred medical costs from injuries. Still others paid to bury a loved one.
Disasters certainly continue, with wreckage and devastation spreading further and deeper than a Germanwings crash site in the Alps or the blast-strewn rubble of a New York apartment building. Just as the loss of life touched all of us, victims’ families now contend with all the futures, including the financial ones, lost.
Life’s path is rarely flat for long. What if disaster, big or small, struck you? You can ready yourself, at least in terms of your money.
Five areas of financial planning overlap. Focusing on a single element often comes at the expense of another. Similarly, lacking flexibility that allows for both big shocks and small bumps in the road, a single blow can undermine everything you try to achieve with your financial plan.
For example, let’s look at a financial objective you might have: generating retirement income. Most options that the Internal Revenue Service and Department of Labor allow for building your retirement plan accounts and so your golden years’ income stream may be sufficient or at least a help; frequently the IRS also grants tax and tax-filing breaks to victims of such regional disasters as earthquakes, floods, prolonged draughts and major storms.
Government agencies’ responses are clearly not the most flexible plans after widespread distress, though, helping only large communities or big groups of people. Individual victims and their families are sometimes forced to tap savings — often retirement nest eggs.
While accessing your retirement plan dollars may help deal with the immediate, personal or small-scale emergency, the move doesn’t address (and in fact hurts) your long-term challenge of generating a revenue stream in retirement. You’re best off reaching for money set aside just for a crisis.
Preserving your flexibility can mean taking the time now to ready a specific financial tool, such as a Roth individual retirement account. A Roth IRA allows you to grow retirement income tax-free and yet still access the contribution amounts without tax or penalty in an emergency.
Catastrophe cash isn’t much good, of course, if you can’t withdraw it fast. Try keeping limited funds (six months of your normal expenses, say) in in an easily accessible savings or checking account. The Federal Deposit Insurance Corp. insures your money up to $250,000; your interest will likely be far less than 1 percent.
You can also explore a money market account from a bank, discount brokerage house or other financial institution, which also pay little interest, usually around 1 percent or less.
Joseph “Big Joe” Clark is the managing partner of the Financial Enhancement Group LLC, an SEC Registered Investment Advisory firm in Indiana.
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