What You Need to Know
- Before the pandemic, cash seemed... so boring.
- Even having six months of savings may not be enough.
- Permanent life insurance can be a good place to store rescue money.
Liquid assets are a major component of a healthy financial plan. Are you making sure your clients have the cash they need to hedge against disasters?
Income shocks produced as a result of the pandemic have had a somewhat purifying effect on financial planning. Before COVID-19, many consumers were dismissive of the idea that strong portfolios need to contain substantial amounts of cash. However, with the COVID-19 lockdowns, most Americans now comprehend the critical role of liquid assets in surviving the unexpected.
Accumulating emergency funds is now a topic of conversation for working families. Advisors and agents can play a pivotal role in assisting their clients in setting emergency fund goals and executing those goals, even in a negative-interest-rate environment.
The “Six Months” Rule Is Changing.
The pandemic has turned the usual “save three to six months of living expenses” on its head. In the future, advisors must help clients set aside emergency funds based on proximity to retirement, the variability of earnings, employment status, and the number of people in their household.
Because they did not customize their emergency plans to their unique situations, many Americans found their savings quickly depleted as the lockdowns dragged on. For example, gig and contract workers are more at risk for lengthy work interruptions than permanent workers. Thus, advisors may want to encourage them to build more considerable emergency funds than the current benchmark.
Similarly, highly-paid workers or those with specialized careers probably need more extensive cash reserves. When these workers are laid off, it generally takes them much longer to find a replacement position. Households with two or more earners may get by with less in their emergency funds, especially if they work in different careers. It’s much less likely that all earners will encounter job loss at once.
Get Your Clients’ Cash Out of the Coffee Can.
Advisors must also help clients determine the best place for storing emergency money. Often nonretirement brokerage accounts are used as a holding place for short-term cash needs. But there are other useful and creative storage options for cash.