What’s the Worst that Could Happen?

4 Stories of Financial Planning Pitfalls: What’s the Worst that Could Happen? 

In my planning practice, I often find that’s a question people simply do not give enough consideration.  When it comes to your plans for the financial future, what -is- the worst that could happen? Well, here are just a few examples…

Situation 1: College fund?  What College fund? 

Problem: No assets on hand that you could easily convert to cash 

A mother, who is a busy professional, focuses all of her energy and resources on her practice.  She reinvests all of her revenues during a growth phase, assuming that when it’s time to pay her son’s tuition, her excess income will be enough to fund it from cash flow.  Unfortunately, high school graduation and a recession arrive at the same time and though she has built a successful business, there isn’t enough income coming in to immediately fund both her lifestyle and her son’s college expenses.

Solution: A good financial planner could work with this mom to make sure that her planning involves setting some of her excess earnings aside each year.  At a minimum, these funds would be available in the event that current cash flow wasn’t sufficient to contribute toward her son’s tuition.

Situation 2: You can’t take it with you…

Problem: Getting (and losing) all of your insurance coverage through your employer

A successful executive at a Fortune 500 company buys the maximum amount of life insurance available through his employer.  Over the years, he has paid in thousands in premiums to make sure that his family is covered.  At age 60, he’s an unexpected victim of corporate restructuring and takes early retirement only to find out that he has emphysema.  Despite a good prognosis, he can’t get insurance on his own.

Solution: Working with a financial planner would help the man see that rather than maintaining all of his insurance through his employer, an individual policy may have been appropriate and could be maintained regardless of his employment status.

Situation 3: Now that’s an unexpected parting gift!

Problem: Forgetting to update your beneficiary designations

Not long after he starts his practice, a young physician takes out a sizeable insurance policy to replace his income for his wife, should something happen to him.  The policy is set up to draft from his savings account.  After several years, he and his wife get divorced and the physician later remarries.  One night while driving home from the hospital, he’s in a fatal accident leaving a $1,000,000 death benefit from his old insurance policy to his first wife.  One of his brides spoke highly of him at his funeral and you can probably guess which one that was.

Solution:  An ongoing relationship with an advisor, including regular reviews, should provide routine opportunities to check and update beneficiary designations.

Situation 4: Easy come, easy go.

Problem: Investing too aggressively

An equity investor hears about a “can’t miss opportunity” from a relative at a recent tailgate.  Upon returning to work on Monday, he uses his company’s discretionary retirement plan to invest half of his nest egg in this “sure winner” to capitalize on its upcoming earnings announcement.  Unfortunately, the announcement included news that the company’s blockbuster drug was not approved by the FDA.

Solution: It’s best to make decisions and set a course during a time that we are not overly emotional.  By having a plan in place that guides his investment decisions, this investor would be less likely to chase every hot tip he receives.

None of these situations are pleasant; I realize that.  They do, however, represent situations that are easily avoidable.  Often we view planning through rose-colored glasses.  We think about all of the wonderful things that we have to look forward to.  Our mind’s eye focuses on the things that we have to do to achieve the goals that we have set out.  It’s natural and it’s an important part of the process, but it isn’t the only part.

“Chance favors the prepared mind” – Louis Pasteur

Someone once said, “I’d rather be lucky than good.”  He wasn’t in the planning business.  I prefer the above rationale of Louis Pasteur.  Most of the situations that life presents us with aren’t complicated when viewed through the proper lens.  I often tell prospective clients, “This may be your first time going through this situation, but it’s not ours.”  Preparing for life’s surprises is part of the process.  It’s an outside-of-the box way of looking at problem-solving, but that type of preparation can be the difference between getting it right and getting what’s left.

***Any opinions are those of Chip Munn and not necessarily those of Raymond James and investing involves risk and you may incur a profit or loss regardless of strategy selected


About Chip Munn

Managing Partner, SWS Senior Wealth Advisor, RJFS Chip is a Magna Cum Laude graduate of Clemson University, where he earned a degree in education and was selected as an Academic All American by USA Today. He began his career in finance as a financial consultant with Wheat First Union in 1998. He specializes in retirement and education planning and the transfer of wealth among generations. Chip lives in Florence with his family. Follow Chip on LinkedIn.