The media are warning of a looming recession, to the point where some worry they are creating a self-fulfilling prophecy.  Yes, there will be another economic downturn someday. Yes, we are all going to die someday. Making drastic changes right now as though either event will occur tomorrow can lead to unhappy consequences.  Far better to have a long-term, organized financial plan in advance. That will allow you to weather the downs (and ups) of the markets and to achieve your financial goals.

Reverse Engineer Your Goals. If you don’t know how much you’ll need to reach your financial goals—beginning with retirement—you’ll never know if you’ve succeeded in reaching them.  A good financial planner can work with you to help determine how to define, meet, and fund your goals. It’s a lengthy, collaborative process. Still, not everyone wants to participate at that level of detail.  One alternative is online financial planning calculators. These can be very complicated or very simple. Just remember—the fewer the inputs, the less precise the output.

Do-it-yourselfers (or those who just want a number RIGHT NOW) can calculate a ballpark figure using last year’s tax return.  Start with adjusted gross income (line 7). From that number, make some subtractions. If you expect to have your mortgage paid off in retirement, subtract your annual principal and interest (but not your property taxes).  If you are saving outside your 401k—for college, for a wedding, or just in a taxable investment account—subtract your annual after-tax savings. Using your most recent Social Security statement, calculate and subtract your projected annual benefit.  Then add back a few numbers: any tax-free cash flow, such as municipal interest income or return of capital. The net number you get is the annual cash flow you’ll need to replace in retirement; most people are used to spending a certain amount annually and will continue to do so in retirement.  If you are an optimist, multiply the net number by 20. If you are a pessimist, multiply it by 25. The result is your target retirement savings.

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Live Beneath Your Means. Very few of us can invest our way to lifetime financial security.  How much you save significantly affects eventual retirement security, and the sooner you start the better.  The standard advice says you should be saving fifteen percent of your salary, beginning with your first full time job.  Not all that fifteen percent necessarily comes from you—employers typically match some percentage of your 401k contribution and may have profit sharing or similar plans.  Still, few begin saving aggressively enough out of the gate, which translates into the need for greater savings down the road.

401k plans can make it easy to save more.  Many now allow you to increase annually the percentage of salary you contribute, up to ten percent of salary.  That increase is automatic. If your plan allows that and you aren’t saving at least ten percent, sign up for this feature.  If you are saving at least ten percent but not the maximum allowed ($19,000 annually; $26,000 if you are age 50 or older), you’ll have to ratchet up your own contribution when you have your annual salary review.

Beyond retirement savings, have a liquid emergency fund.  Standard advice says you should keep between six and nine months of living expenses readily available.  What you should have salted away depends on your age, your other resources, whether your have a working spouse, and your appetite for risk.  You may want cash in the bank, you may have a HELOC established on your home for emergencies, or you may have some other arrangement. When in doubt, go with the default.   This fund is not a piggy bank—it’s for job loss, medical emergency, significant market downturns, and the like.  

Automate contributions to that emergency fund.  Once it’s established, automate contributions to a traditional IRA and taxable investments.  You want a mix of taxable and tax-deferred accounts to provide more funding options in retirement.

Remember the buzz some years back, about The Millionaire Next Door?  The millionaire is the person you never notice—he lives in a modest house, drives an older car, and doesn’t take expensive trips.  Living on less means being able to save more. It also means needing to save less to meet your goals—an added bonus. Plus, because spending typically occurs with after-tax dollars, cutting costs by a dollar can free up to $1.50 (or more) to invest.  Specifically, living in something smaller than the largest house you can afford reaps all kinds of benefits—lower mortgage payments, lower maintenance costs, lower property taxes, lower utility bills, and so on. Keeping up with the Joneses (who may be mortgaged to the hilt) gives you far less financial resiliency than you are likely to want in a severe downturn.  You may or may not be willing to downsize your home, but take a look at your big ticket items. Be certain your large expenditures are things you truly care about, not merely things you’re in the habit of purchasing (or leasing!).  

Construct an All-Weather Investment Portfolio.  Build out your investments based on your financial goals, not on the latest headlines or tweets.  First, go back to that target retirement savings number. Cranking in your future savings, what average investment return will you need to meet your goal?  From that number, you can build out an asset allocation between equities, fixed income, and cash that will allow you to achieve that goal. In a perfect world, you are comfortable with the resulting allocation.  However, if it is more heavily tilted towards equities than you want, you have decisions to make. Should you save more aggressively, retire later, plan to live more frugally? You may need to run several iterations to hit the sweet spot of meeting your goals and sleeping at night.  Your overall allocation should change, if at all, with major life events. Don’t be distracted by short term—or even not so short term—market fluctuations.  

Beyond allocation, diversify your holdings.  Equities should be spread across the major economic sectors of the economy.  Investors hit hardest in market downturns are those most heavily weighted in one or two hot sectors that suddenly become cold.  Fixed income belongs in investment grade securities, diversified across issuers.  

Finally, rebalance regularly.  Each time, reduce positions that have grown outsized and reinvest into those currently below your target allocation.  However difficult this seems, it is the definition of buying low and selling high. Regular rebalancing means you enter a recession with less exposure to overvalued sectors and stocks.  It means you can take advantage of pullbacks. A long term, consistent plan, not sharp gyrations in response to the news cycle, is how successful investors grow—and preserve—their portfolios.

Note: Claire E. Toth, JD, MLT, CFP™, is Vice President at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit. Visit us at  ptview.com.

For over 25 years, Point View Wealth Management, Inc. has been working with families in Summit and beyond, providing customized portfolio management services and comprehensive financial planning, to develop and achieve their financial goals.  Click here to contact David DietzeClaire TothFritz SchoenhutDonna St.Amant, and Elaine Phipps, or call 908-598-1717 to learn more about Point View Wealth Management, Inc. and how we can help you and your family meet your financial objectives. To sign up for our complementary commentaries and newsletters, e-mail us at firm@ptview.com.

CNBC has named Point View one of the Top 100 fee-only wealth managers in America.