By Paul S. McNulty, CFP®
As you’ve heard it said, the one thing that is predictable in life is that it’s unpredictable. Natural disaster, divorce, or a death in the family, whatever it may be, when catastrophe strikes, it can have serious repercussions on both your personal and financial life.
As we go about our day-to-day, we typically have little to no control over these kinds of unexpected events. And since none of us are exempt from life’s transitions and surprise circumstances, it’s important that we have our finances prepared in advance. This proactive step helps to ensure that we will be ready to take the appropriate steps when the time arises. Don’t risk doing something you may later regret by making high-pressure decisions in times of stress. Instead, follow this checklist to avoid a financial crisis.
1. Stay Away From Making Decisions Under Stress
Regardless of whether you’ve lost a job, a parent, or a spouse, it’s important to take six months to a year before making any big decisions, such as selling a house or making a large purchase. Research shows that people are more likely to ignore long-term consequences when making decisions under stress. (1) Even if you don’t feel like your decision-making is impaired, the prudent choice is to wait at least a few months and make sure you are truly taking long-term effects into consideration with a level head.
2. Need To Sell Assets? Rely On Your Advisor
Generally speaking, financial crises usually require funds to take care of the various issues that arise. However, it is critical that you avoid liquidating assets without first seeking the advice of a financial advisor. Selling investments and making withdrawals can create tax liabilities and may even incur fees and penalties. Pressure to sell large assets like real estate can result in a lower sale value and, in some cases, can also contribute to unintended or costly tax mistakes.
Your advisor can help you evaluate all of your assets and decide which ones to liquidate first, even helping you delay the sale of larger assets so that you can get a fair price.
3. Consider Taxes, Penalties, And Fees
Investors who find themselves under stress often sell investments without fully thinking it through, which can end up leaving them with hefty tax bills, fees, and penalties at the end of the year. It’s critical to understand the tax treatment and associated fees of any withdrawal you make .
For example, if you withdraw funds from a tax-qualified retirement account before you are 59½, you will generally owe ordinary income tax on the distribution and a 10% penalty. However, some expenses are exempt from the penalty, so it’s important to consider whether your expenses qualify.
Many investments, like life insurance policies and annuities, may have substantial early withdrawal fees to consider. When you take into account fees or penalties, it may make more financial sense to liquidate a different asset. Work with your advisor and CPA to coordinate a strategy that will reduce the taxes, fees, and penalties you will pay.
4. Get A Second Opinion
In times of grief, shock, or stress, it is safe to assume that your mental state and decision-making capabilities will be compromised. Unfortunately, there are people out there who take advantage of those who are at a vulnerable point in their life.
Just as with medical procedures, it’s important to fully understand the risks and benefits of any option you’re considering when it comes to your financial decisions. If you are unsure of the service and advice you are receiving, reach out to other professionals for a second opinion before you make an irrevocable financial choice, especially if you don’t have an existing relationship with a financial professional.
5. Don’t Do Nothing
While it’s important to take your time when making major financial decisions, and this piece of advice may seem to contradict prior points, there is also a danger in doing nothing. Not taking action can be risky if your assets are invested too aggressively or are losing value. Being paralyzed by fear may only increase your financial stress. The key is not to do nothing at all, but rather to do nothing impulsive. Evaluating your options and understanding the risks in order to come up with a plan can help you feel more confident and informed in your ability to take action and make wise choices when they are needed most.
If you or someone you know is facing a crisis, or if you know that your finances are not set up to withstand a crisis, we are here to help. Our team at Boston Metro Advisor will walk you through our personalized process to fortify your finances, reduce your risk, and prepare you for life’s inevitable transitions. To learn more about how we can help, contact us for a complimentary consultation by calling (781) 995-0253 or email me directly at [email protected] today!
Paul McNulty is the founder of Boston Metro Advisor with over 20 years of experience helping people navigate the ups and downs of the economy toward the financial future they envision. His education consists of a Bachelor of Science in business administration from the University of Rhode Island and the CERTIFIED FINANCIAL PLANNER™ (CFP®) professional designation.
Paul’s experience and education have made him a multi-faceted professional capable of assisting people with virtually all their financial needs. His services include every facet of retirement planning, from 401(k) rollover services and income planning to wealth management and estate planning. Paul has been active in his community over the years as a youth sports coach. When he’s not spending time with his wife, Cindy, and their two children, who are both recent college graduates, Paul enjoys reading, playing golf, and fishing. Learn more about Paul by connecting with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.