History is filled with unpredictable events that catch us off guard, shock us, and often wreak havoc in our lives. That can impact our short- and long-term future. Sometimes, if we are really fortunate, we might get a “heads-up” with a brief or subtle warning about impending trouble ahead. Things like really bad weather such as a hurricane or tornado heading our way, or new laws being passed that will affect us all beginning next year. What would you do if you knew for sure that trouble was coming?
The truth is we never can be 100% certain what the future will bring. The phrase “anything can happen and it usually does” comes quickly to my mind.
How Could This Happen?
Sometimes, there’s even a real feeling of certainty about what’s going to happen and yet somehow it doesn’t pan out. That’s what happened when I was a kid back in 1964 when the Philadelphia Phillies had a 6½ game lead in the National League pennant race with just 12 games left to play. They then failed to make it to the World Series when they lost 10 consecutive games at that critical point in September. Everyone just knew that this was the Phillies year and was totally preparing for the event. But, a not so funny thing happened and the Phillies baseball fans of a certain age have yet to recover from the “World Series that never was”.
Here are the tickets I still have:
Does Your Future Scare You?
There’s also the seemingly endless speculation we often hear about what “could”, “might” and “will” soon happen and what we should all do to prepare for it. If you don’t believe me, just spend a few hours watching CNN, MSNBC, or Fox News and you become convinced, according to some, that anything can and will happen and mostly it isn’t very good news! Unfortunately, as a retiree, I have lots of time to watch and I am a glutton for punishment. It sometimes scares me.
“Hindsight is a perfect 20/20” and that is certainly correct. But if you do not possess a crystal ball that actually works (let me know if you do please, I want to get ready for next year’s Kentucky Derby at the very least!), then you are probably like everyone else out there on what may be a fragile limb and hanging onto it for dear life!
Instead of wandering around with your rose-colored glasses on or worse, hiding in the corner with a blanket over your head because you fear what will happen tomorrow or next month or next year, you can do something else. You can be prepared! Yes, that old Boy Scout motto invoked right here once again so ask yourself this question: “What would you do if you knew for sure that…?”
Four Questions About What You Would Do
1. What would you do if you knew you were going to lose your job next year?
If you knew for sure that you were about to lose your job, you should already have a plan in place to help get through those rough times ahead. The six things I recommend that you do well before a critical job loss when and if it occurs are:
- Make certain you have an emergency fund prepared for at least 3-6 months’ expenses. That’s something you should do anyway, but when you know bad news is coming, it is ultra-important to get it done.
- Living within your means, setting up a proper budget, and saving money (even in a recession) is a necessity all the time, but there’s no more dire moment to adjust as when you think you are about to lose your income.
- Consider refinancing your mortgage or opening a Home Equity Line of Credit (HELOC) and use the extra money to lower your monthly mortgage payments. If that works for you, apply for the refinance now, while you’re employed and can qualify for it.
- Consider mortgage unemployment insurance. A mortgage is most people’s largest expense. Mortgage unemployment insurance pays your mortgage if you lose your job, if you’re laid off or fired. As with all insurance, it’s all about risk—you’ll need to weigh the cost of the insurance vs. the chances of you being unemployed.
- Join a professional association and start networking. Joining an industry association will help with accessing new job postings, networking, and getting group discounts on medical and other insurance when you lose your job. The sooner you make professional connections, the greater the chances of you replacing your job quickly. This is also a good time to update and clean up your current résumé and social media profiles as well as join professional social networking sites like LinkedIn which future employers will likely check.
- Post your résumé immediately and anonymously—most of the top online job search sites including top-rated Indeed will let you do that.
2. What would you do if you knew for sure we were heading towards a big recession next year?
Recession is a normal part of the economic cycle and every few years we go through it and come back out alive and well. For some of us, it feels like it is the end of the world and everything is falling apart, but don’t forget that it’s a cycle. Understanding recession will give you some peace of mind.
- Reduce your debt. If you have any consumer loans, try to get rid of them to ensure you are still solvent. Do not get fooled by low interest rates, it’s a trap. If you have credit card balances, you should call your institutions and try to reduce your interest rates or transfer and consolidate the debt to a new card with low rates. Then pay it off as fast as you can.
- Diversify your income and it can act as a buffer during a recession. If you haven’t already started this process, do it now. It’s basically having different income streams so in case you lose your job (which often goes hand and hand with a recession), there is some income coming in.
- Continue your investment plan. If you are saving for long term goals, continue to do so. Recession is a bad time to change your investment strategy…if you are a buy-and-hold type of an investor, continue to do so.
- Balance your portfolio to stay within your asset allocation plan. A recession will bruise your portfolio, but do not panic. Do not be afraid of stocks if you have a long term view, recessions are the best time to purchase good long term investments.
3. What would you do if you knew the government was going to drastically cut your Social Security and Medicare benefits?
Cuts to Social Security and Medicare would affect different people in different ways. If you’re not yet collecting Social Security or Medicare benefits, then this is what you need to know:
- There’s no need to start your Social Security benefits now to lock them in before they change. If the government adopts any changes to the Consumer Price Index (CPI) for future Cost of Living Adjustments (COLAs), it will apply to all retirees, past, present and future so you can’t avoid it by retiring now. And if they change the retirement age, that will most likely apply to all people who are younger than a specific cutoff age, such as 55 or 58. None of the most recent proposals applied higher retirement ages to people who are currently age 62 or older and eligible to start their Social Security benefits.
- Don’t breathe a sigh of relief; benefits will at some point have to be changed. It’s inevitable that the retirement ages will eventually be increased and other benefit reductions may be adopted. You should prepare by counting on the fact you will be retiring with benefits in your late 60s or early 70s.
- Get serious about taking care of your health. It’s inevitable that in some way skyrocketing health care costs under Medicare will have to be reduced.
- Start socking away money for your retirement savings. It’s also inevitable that in some way, your future Social Security benefits will be reduced.
The situation is potentially worse for current recipients of Social Security or Medicare. Use of the chained CPI would cause a gradual erosion of the buying power of Social Security income, and that could hit low-income recipients quite hard. Many current recipients can’t do much about it because they may not be able to go back to work or save more to compensate for a benefit reduction.
- If the government is unable to raise the debt ceiling, its ability to pay current Social Security and Medicare benefits becomes very doubtful. That event would be doomsday and it could actually happen if the debt keeps piling up as it is right now. Having a backup plan in case your Social Security or Medicare benefits are cut or temporarily suspended is a must!
- Consider whether you are able to downsize your home and/or your car. Create a “bare bones” budget to use if needed to stretch what savings you have.
- There aren’t any pleasant messages here but that’s the reality we’re facing. Try to be as self-sufficient as possible and not be entirely dependent on these benefit plans. They were never intended to be your sole support when you retire and you must start saving towards your retirement ASAP. That means today, and the younger you are when you start, the better your defense against the collapse that may occur.
4. What would you do if inflation rises into double digits next year?
If you knew that someone were coming to rob you, you’d take precautions to protect yourself, wouldn’t you? Inflation is just like a robber. It’s a silent thief that whittles away the value of your money, making each dollar worth less and less over time. Some inflation is actually interpreted as a sign of growth in a healthy economy. However, when it exceeds the 2% government target and hits the big numbers, it can be a real disaster. How can you protect yourself?
- When inflation is on the rise, do your best to keep all sources of income, such as salaries and investments, growing as fast as (or faster than) your expenses. During deflationary periods, as prices decline, try to increase your savings instead of spending more.
- A good way to boost your chances of maintaining a salary that keeps up with or outpaces inflation is to pursue skilled positions that are relevant. During inflationary periods, negotiate more aggressively for larger raises.
- The best time to look for work is actually during an inflationary period when unemployment—and, therefore, competition for jobs—is lower.
- Credit and loans are cheapest during low inflation conditions because creditors are pressed to spur consumer demand. Avoid loans and debts as much as possible as inflation rises because interest rates follow suit.
- Retirees and disabled people are especially vulnerable to inflation. That’s because they rely on a “fixed income” such as their Social Security benefits. If prices rise too quickly, they may have difficulty covering living expenses, leaving them with little or no disposable income. If you’re 25 or 35 years old and your salary isn’t cutting it, chances are, you can get another job. But that isn’t as easy when you’re elderly or disabled.
Government benefits do go up annually in response to inflation with a Social Security COLA if the government determines inflation has occurred. But to prepare for potentially decreased buying power in your later years, establish savings and contribute to a retirement fund during all your working years. That’s the way to complement your government benefits as they lose value due to inflation.
Since none of us can actually predict the future (even the weather or financial news), we need to seriously stick with a conscientious financial plan as we talk about here and in many other personal finance blogs, books, and podcasts. You are only prepared for what may come when you stay diligent in that process.
What are your answers to the “What if you knew” questions and what suggestions and answers do you have to be more prepared for them? Are you prepared for what your future holds or are you still hanging out on a limb?