With the new year upon us, we can’t help but wonder what will be in store for us. Will
there be a recession? Will gas prices soar to $ 4.00 a gallon? Will real estate prices
continue to drop? Will the Michigan State Legislature and Governor Granholm raise
taxes again to solve our state’s financial woes?
Our clients often ask what we think will happen to the economy, the stock market or
interest rates. We often reply that if we could accurately predict those variables, we
could make millions and wouldn’t need to provide financial advisory services to others.
After all, even the economists can’t agree on the future!
The only thing we are certain about is that there will be lot’s of uncertainty in 2008 and
beyond. We’ve already seen tremendous market volatility followed by a surprise interest-
rate cut from the Fed. Energy prices will certainly rise, taxes may increase and at some
point there could be another horrible terrorist attack here in the U.S. So what should
you do to prepare for an uncertain future? Following is a list of key “To Do’s” that will go
a long way to position you for whatever unfolds down the road:
First and foremost, eliminate all credit card debt and make sure you have an adequate
emergency fund invested in cash or cash equivalents (e.g. money market funds). At
least three to six months of fixed and variable living expenses is needed. If there is only
one main income earner in your family, then six months expenses is preferable.
Second, make sure you have adequate insurance policies for health, life, auto, home
and disability. Too often, our clients don’t have long-term disability policies, yet you are
more likely to become disabled on a given day than you are to die! Consider also a
long term care policy and an umbrella liability policy. With our highly litigious society, an
inexpensive umbrella liability policy could quite possibly save you from a disastrous
lawsuit.
Once you have addressed the above basics, focus on increasing your savings. Review
your spending and cut out unnecessary or frivolous expenditures. Make sure you are
investing the maximum in your employer’s 401(K) or 403(B) plan. Take advantage of
any retirement plan matching provided by your employer.
Once you’ve maximized your savings, make sure you have a sound investment strategy
that is based on a broadly diversified, low-cost, tax-efficient portfolio. Your portfolio
should include cash, short-term and intermediate-term bonds, international bonds, large
and small domestic stocks, international stocks and real estate equities. You should
utilize no load mutual funds, index funds and exchange traded funds (ETFs).
Finally, consider improving your marketability. Go back to school for another degree or
advanced training. Consider positioning a hobby or a long-held dream to become a
future avocation or business. The days of thirty-year careers with one employer appear
to be gone forever. The likelihood of losing your job due to outsourcing, merger or
corporate bankruptcy is greater than ever. Even if you stay employed, preparing for a
second career can position you for an early “semi-retirement” doing what you love.
More and more people are working part time in retirement. They enjoy keeping busy
pursuing their dreams while the extra income reduces the amount of retirement funds
required. Preparing for a second career provides all that and a possible fall-back
position should they lose their job before retiring.
In summary, the best way to provide for an uncertain future is to position yourself to
weather whatever storm comes your way.
Note: we have assumed that if you are a homeowner, you have a house that you can
afford. If that is not the case, you need to either cut back significantly on other,
discretionary expenses or start taking steps to downsize as soon as possible! Of course,
with today’s real estate market, selling your home could be a real challenge.
David C. Patterson, CFP® and Erin Patterson, CFP® are the owners of Patterson Advisors, LLC, a fee-
for-service-only financial advisory firm. Patterson Advisors, LLC is a Registered Investment Advisor,
registered with the State of Michigan, helping clients in Waterford, Clarkston and Royal Oak, Michigan
as well as other Oakland County, Michigan communities . Visit www.pattersonadvisorsllc.com for more
information or call 248-674-2108.
Published in the Oakland Insider, January, 2008,
How to Prepare for an Uncertain 2008 and Beyond
By David and Erin Patterson