Planning for Resilience
How designing your portfolio to protect against life's uncertainties and disruptions can help create greater long-term financial and emotional well-being.
Illustrations by Klaus Kremmerz
If the last few years have taught is anything, it’s that things can change quickly—and in unexpected ways.
Just ask Billy Hensley. As president and CEO of the National Endowment for Financial Education (NEFE), a Denver-based nonprofit that works to improve and maximize the impact of financial education, Hensley spends much of his time studying and thinking about how people can make better and more informed choices in order to live their best financial lives.
Among the lessons he works to convey? Stuff happens. In fact, it happens to most of us far more often than we expect. In any given year, Hensley says, the average American has nearly a 70 percent chance of suffering a financial setback via an unexpected major expense.
And that’s not all. According to Hensley, 96 percent of Americans will have four or more major “income shocks”—that is, major life and financial challenges such as a divorce, a serious car accident, an ill loved one who needs extensive care, or a sudden layoff—by the time they turn 70.
“Financial volatility happens to us all,” he says. “The data are very clear. And this is not a one-time thing. This is multiple times in your life.
“Let’s say you start working as a teenager and retire in your 60s. That means a shock is going to happen to you, give or take, every decade and a half. And if those shocks happen in close succession, they may completely derail your financial life.”
Just as large-scale political and economic disruptions can turn a bull market into a bear market on Wall Street, personal disruptions can turn our individual lives upside down. And just as investors traditionally have sought to address market volatility by diversifying their portfolios, people can better protect themselves against life volatility by taking a holistic approach to financial planning—carefully mitigating against all kinds of potential shocks to create a more balanced and resilient portfolio.
By doing so, people also can boost their psychological well-being, reducing the stress and anxiety that can come with uncertainty while setting the stage for greater long-term happiness.
“The key to a plan is that it needs to be much broader than just the finances,” says Nick Lane, president of Equitable, a financial services company. “It needs to speak to your emotional well-being. You need financial peace of mind, emotional peace of mind, and administrative peace of mind that someone’s going to help you deal with all the complexity of getting that done.
“A resilient portfolio is one in which you have confidence that it is going to allow you to live the life you invent and have envisioned for today and in your next chapter, regardless of those external forces. It allows you to think beyond material goods, and about what is truly going to bring happiness and give satisfaction.”
Preparing to live longer-and better
To make your personal finances more resilient, Hensley says, start with some basic steps. Take care of your health. Keep your job skills up-to-date. Make sure that your house and other personal property is adequately insured. Create an emergency fund to help with unexpected major expenses; start where you can and build it up over time to cover three, six, or even 12 months of living expenses.
Next, review your long-term financial planning—carefully thinking through the kinds of risks you most want to mitigate, and how your needs may shift over time. “We often make decisions about risk when we start a new job or get advice from a family member or financial planner,” Hensley says. “But we don’t always go back and reexamine those decisions while considering changes in our lives.
“Have your goals changed? Have the risks in your life changed? Did you start a family? It’s easy to get into a routine and put that thinking off, because so many other things want our attention. But if we try to be intentional and accountable, we can ask ourselves those key questions—and not get caught without, say, the proper insurance that we now need.”
Among those key questions? Longevity. Here’s the good news: thanks largely to advances in medicine, Americans are living longer and healthier lives than ever before, extending our golden years into decades. It’s not uncommon for today’s retirees to remain active into their 70s, 80s, and even 90s—whether that means starting a second career, taking up dance, or reuniting with a long-lost love.
“People aren’t just living longer,” Lane says. “They have greater aspirations for what the next chapter will be. The old notions of retirement, I think, are foreign to people. They’re not just going to stop living. They want to continue to participate in the community or start the small business they always wanted.”
Now for the not-so-good news: too many people aren’t financially prepared to fully realize meaningful lives after work. At least one-third of Americans are estimated to have insufficient funds to retire at their current standard of living. In 2019, the Federal Reserve reported that 44 percent of all non-retired adults felt that their retirement savings were “not on track.”
“A big financial risk in retirement is outliving your money,” says Evan Press, a California-based partner at Pacific Coast Wealth Strategies and an Equitable Advisors Financial Professional.
In the past, many retirees could count on defined-benefit pensions, which typically saw firms provide guaranteed monthly payments to their former employees. But today, most companies no longer offer them. Instead, many people now expect a combination of Social Security payments, personal savings, and investment returns to provide sufficient retirement income. In 2020, roughly 60 million Americans held $6.5 trillion in retirement savings in 401(k) accounts.
“When you ask people, ‘do you wish you had a pension?’ they say “yes, but I didn’t have access to one,’” Lane says. “So how do you create one of your own?
One way people can seek a potentially greater level of certainty—and close potential gaps between what they need in retirement and what they can currently expect based on their personal mix of savings and investments—can be though annuities, which work by a converting premiums that an individual pays to an insurance company into a stream of income that the same person can’t outlive.
Like all financial products, annuities aren’t necessarily a good idea for all people in all situations. Everyone’s needs and goals are unique, and individuals who already have pensions or other savings sufficient to support their living expenses from retirement to death may not find a need for annuities.
However, annuities can be a useful tool for people who want a source of guaranteed retirement income. Suppose you need $5,000 a month to maintain your everyday life in retirement, and are expecting to receive a guaranteed $3,000 monthly from Social Security and $1,000 monthly from an employer pension.
“An annuity could close that difference of $1,000 a month, allowing you to make sure that your basic expenses are covered by guaranteed sources of income,” * Press says. “Then with the rest of your money, you might choose to invest in other ways.
“For a lot of people, that makes sense. They’re not putting all their eggs in one basket. And they know that for the rest of their life, they’re getting some level of guaranteed income. There are some costs associated with that, but you’re also getting some sense of certainty.”
Protecting your loved ones—and your legacy
When it comes to planning for tomorrow, most people envision a future with themselves at the center, living and functioning much as they do today.
By contrast, few of us consider being seriously ill or disabled, and how that might change our financial needs. Nor do we think about what would happen if we abruptly passed away, or what that would mean for the people and things we most care about.
“The majority of us only think about those things when something traumatic happens to us, or when we hear about something traumatic,” Hensley says. “The death of a friend. A neighbor’s home burns down. That forces us to reexamine our financial and risk management plans.”
For some of his clients, Press says, the pandemic has prompted revisions to previous long-term financial plans, rooted in the desire to better protect their loved ones in the event of disability or death. Disability income insurance can cover the former, and life insurance can help with the latter.
“You see people starting to realize that they may need to plan a little better—to make sure that they have their ducks in a row,” *Press says. “With life insurance, people who don’t have it are making sure they do, and those who do have it are making sure they have enough coverage that their families are going to be taken care of.
“That’s extremely important—if something happens tragically, a lot of times the investments and savings you currently have aren’t going to cover everything. Especially if you have a young family.”
* This hypothetical example is not indicative of any particular annuity or other financial product, nor does it account for the impact of any fees or taxes. All guarantees provided by annuities are based solely on the claims-paying ability of the issuing life insurance company.
To determine what kind of protection you may want and need—whether you are a wage-earner, a caregiver, or fit into another category—Hensley recommends asking yourself a series of questions:
- Who would be responsible for any financial obligations I have—mortgages, loans, other debts—if I died?
- Who depends on me for income, caregiving, or other support? Children, spouses, parents, siblings, others?
- What would happen to those people if I died or got sick or injured at work?
- What would it take to replace the support that I currently provide those people? And for how much time going forward would I want that support to be replaced?
“I just had one of my clients pass away last fall,” Press says. “He was young, 63 years old, and passed away in his sleep. He had life insurance with me and policies with other carriers.
“I worked with him with all his investments, but I thought, ‘what if he didn’t have all that insurance?’ And what I can tell you is that while his wife might still be okay, she wouldn’t have the financial comfort level that she’s going to have because of that insurance. Not by far.”
Beyond covering loved ones, a life insurance death benefit also can provide needed liquidity to an estate, business, or charity. Angela Anderson, an Ohio-based Regional Vice President with Equitable Advisors, says that it is important to think broadly when figuring out how to make your portfolio more resilient against factors that are out of your control—and to consider more than just math.
“Your conversations have to go beyond the numbers,” she says. “We get to know our clients in a way that allows them to be vulnerable and honest and talk about things like, ‘I have a blended family. It is important that I continue to tithe to my church, I have a charity that I’ve been giving to for my entire life—and I want to have that as part of my legacy planning.’
“It’s so important to ask those questions. I’ll see some dog decor in a client’s home, see that they have five dogs, all of them rescue animals, and ask them, ‘is it important to you to make sure that there are funds to keep dogs away from being euthanized? Is there an organization that you would like to support?’ If so, there are ways to plan for that.’”
For some people, higher earners in particular, certain types of life insurance can offer both financial protection against premature death and substantial tax-deferred wealth accumulation. “The simple way to think about that is if you put your money in a 401(k), it grows tax-deferred,” Lane says. “And if you put money in one of these insurance products, it grows the same way.” * *
** Please note that 401(k) plans and cash value life insurance are fundamentally different. A 401(k) is a tax-advantaged employer-sponsored plan designed to facilitate retirement savings for plan participants. Cash value life insurance is a contract that builds value and provides a death benefit backed by the claims-paying abilities of the issuing life insurance company.
“What’s important in your life?”
Perhaps the biggest benefit of building a resilient portfolio is psychological. Research has shown that uncertainty creates significant stress, negatively impacting our physical and emotional health.
Social scientists also have found that setting achievable goals and adopting realistic expectations about what we can achieve in both the short and long term can help resolve that stress—as can financial planning that takes unforeseen life shocks into account.
“For many of my clients, it really comes down to the sleep factor,” Anderson says. “Are there things that are keeping you awake at night, things we can plan for and protect against?”
Uncertainty also affects our decision-making, making us more reluctant to take risks and less likely to focus on the potential for rewards. A plan for the future that includes protection can lessen or eliminate that effect, freeing us to make more beneficial decisions about how we invest our money and grow our assets.
A recent study of retirement investors found that investors with annuities were more patient and held their investments longer—even during times of market turmoil.
“It’s easy to feel really smart because you’ve invested in a particular company when its stock price is rising—and then feel like a lot less smart when that price falls,” Lane says. “But when you’ve locked in a lifestyle and have that secure base—a stream of income going forward that can withstand some level of volatility—it takes the emotion out of your other investments, the highs and lows of the market going up and down.”
Ultimately, Lane says, a financial plan that can withstand both life and financial disruptions is similar to a durable house: something that meets your needs, and will be there as long as you need it. The key to building both, he says, is to understand what you want to protect now—and to picture what that looks like in the future.
“The first thing you should ask is, ‘what’s important in your life?” Lane says. “What do you take joy out of today? Where do you envision joy coming from tomorrow?
“That will help you understand the purpose behind your assets. Then you can determine the actions that you can take now that will prepare you for that next chapter, well before it comes. Think about it as your life plan, not just your financial plan. If you melt those two together, it’s so much more powerful. And you’ll make better decisions in terms of your financial choices going forward.”