Risk Management

Risk Management can be defined as “planning for the what-ifs”. Quantifying the potential for loss (based on various analyses) must be precise if accurate solutions are to be considered.

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When considering a financial plan, this comprehensive process should not be completed without answering these basic questions:

  • What if I lose my job?
  • What if I become disabled?
  • What if I die prematurely?
  • What if I live longer than expected?
  • What if my emergency fund is not sufficient?
  • What if my Life Plan does not suit my profile later?

Now, consider some of the not-so-obvious “what ifs” that are often overlooked, even by seasoned planners. These blind spots present greater threats and may warrant advanced planning.

  • What if I am sued?
  • What if growth rates change?
  • What if inflation rises?
  • What if I need long-term care?
  • What if taxes are higher after retirement?
  • What if I fail to accurately name beneficiaries?

Risk Avoidance:

This entails attempting to avoid high-risk activities which could result in catastrophic impacts on personal finances. Speeding, extreme sports, or smoking are all examples of high-risk activities.

Risk Retention:

In this method, one assumes all the risk and chooses not to mitigate the risk at all. For example, forgoing long-term care insurance due to the belief there are enough assets and income to cover the costs should the need arise.

Risk Reduction:

Also known as loss prevention and control, this involves minimizing risk. For example, installing smoke alarms in your home can help reduce catastrophic loss. This, however, does not eliminate the need for insuring the asset.

Risk Sharing:

In this strategy, one assumes a limited degree of manageable risk and transfers the balance of risk to one or more organizations. Paying for medical insurance is a perfect example of risk sharing.

Risk Transfer:

As it sounds, completely transfer risk to a third party for consideration of an insurance premium. Life, disability, and liability risks are often transferred in this way.

“What ifs” are real, and they usually occur at the most inopportune times. Hoping these scenarios never happen is not a reasonable strategy. The type and extent of risk management planning, like other areas of wealth planning, depend on your current situation. Let’s get started!

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