On the Horizon: The Perfect Financial Storm 

The economic future can seem uncertain: as we start a new decade, many financial forecasters still predict an upcoming recession, the SECURE Act has spurred changes in retirement planning and general overconfidence in the stock market abounds. While I have observed a variety of my client’s financial attitudes from optimism to apprehension, a recent study conducted by MDRT shows the majority of Americans (82%) are at least somewhat nervous they will personally be impacted by a recession in the next year or so. To navigate the current economic landscape, we anticipate clients will rely more on professional opinions to find peace of mind in the midst of ambiguity, so it’s our duty to provide valuable solutions to ease concerns.

Reality Check
Running out of money in retirement is one of our clients’ biggest fears. However, clientele can be complacent and too trusting in the stock market since it’s performed so well and hasn’t had a major correction in the past 10 years. Now is the time to encourage clients to be very careful and prepare for turbulence. I see clients taking too much risk, which can be detrimental when a correction does take place. Having open conversations about what to do if a recession occurs will set clients up for lifelong success. If we effectively communicate the impending reality, we can help clients establish alternate revenue sources prior to any major economic event so they are sheltered and don’t fall into the risk of pulling from other portfolios.

Financial Safety Nets
With the lack of consumer preparedness, the perfect storm is brewing and radar shows a potential for taxes to increase and the stock market to correct itself. One way to help clients understand the threat of a recession and risk of relying on the stock market is by discussing the sequence of returns risk. Large negative returns in the early years of retirement pose significant risk to a client’s ability to sustain themselves through their portfolio. To mitigate the potential of running out of money due to an unpredictable market or looming recession, encourage clients to establish different asset classes, such as cash value life insurance or a home equity conversion mortgage.

Cash Value Life Insurance
Cash value life insurance is often a viable solution for individuals and business owners who seek shelter from the economic storm. Some top national brands like Walt Disney or McDonald’s put money into cash value life insurance policies to save their businesses in case of a recession. This asset class protects money from market fluctuations and allows the policyholder to borrow against the policy rather than taking out of an investment portfolio, which can deteriorate from the sequence of returns risk.

Home Equity
Home equity conversion mortgages (HECMs) are another tool clients that are 62 years or older can use to prepare for a recession. This type of reverse mortgage serves as a credit line based on a home’s appraised value. Clients can tap into the mortgage without paying back the principal or interest while they are living. HECMs function as useful monetary sources during uncertainty and can be used for any purpose, including long-term care.

Leverage Technology
Proactive communications during and beyond tumultuous periods can make all the difference. In the same MDRT study, Americans with advisors were interested in hearing from their advisor by phone or email (53%) and via in-person meetings (51%) if a recession occurs in the near future.i From my experience, the most effective way to break through client information overload is to pick up the phone and use virtual meetings with platforms like Zoom. Even though I work with clients across 30 states, I share advice from the same room with the click of a button thanks to easy-to-use, technological innovations. These meetings can even include clients’ children, and if clients aren’t comfortable with the technology, coach them through the platform to increase their adoption. Being able to virtually communicate face-to-face further builds trust and adds value to our relationships, which is all the more valuable in times of uncertainty.

Preparation is Key
In the event of a recession, clients may rely more on their financial advisor to ensure personal financial plans aren’t negatively affected by changing economic climates. According to the same MDRT survey, nearly one-third (32%) of Americans with an advisor say their dependence on their financial guidance would increase in a time of uncertainty.i There is no better time to sharpen your risk management skills and prepare for the rainy days ahead.

Rao GarudaRao Garuda, ChFC, CLU, is a 37-year MDRT member, with 26 Top of the Table and 24 Court of the Table qualifications. He is the author of several books, including “The Meaning of Money: Creating Not Just Wealth on Your Balance Sheet But Significance in Your Life.” By joining and engaging with industry peers via associations like MDRT, you can keep your skills at the top of their game.