If there’s one thing we can predict in life, it’s that it’s unpredictable. Whether it’s a natural disaster, divorce, or a death in the family, upheavals like this can have serious repercussions on your life and finances.
As we live our day-to-day lives we usually have little or no control over these kinds of unexpected events. Since life transitions and surprise circumstances happen to all of us, it’s important to prepare our finances in advance and be ready to take the appropriate steps to avoid making decisions you may regret in times of stress. Follow this checklist to avoid a financial crisis:
1. Stay Away From Making Decisions Under Stress
Regardless of whether you’ve lost a job, a parent, or a spouse, it’s important to take six months to a year before making any big decisions, such as selling a house or making a large purchase. Research shows that people are more likely to ignore long-term consequences when making decisions under stress. (1) Even if you don’t feel like your decision-making is impaired, wait a few months to make sure you are considering long-term effects.
2. Need To Sell Assets? Rely On Your Advisor
Often, financial crises require funds to take care of issues that arise. However, it is critical to avoid liquidating assets without the advice of a financial advisor. Selling investments and making withdrawals can create tax liabilities and may incur fees and penalties. Pressure to sell large assets like real estate can result in a lower sale value and sometimes can contribute to unintended or costly tax mistakes.
Your advisor can help you evaluate all of your assets and decide which ones to liquidate first, even helping you delay the sale of larger assets so that you can get a fair price.
3. Consider Taxes, Penalties, And Fees
Investors under stress often sell investments without thinking and end up with hefty tax bills, fees, and penalties at the end of the year. It’s critical to understand the tax treatment of any withdrawal you make and the associated fees.
For example, if you withdraw funds from a tax-qualified retirement account before you are 59½, you will generally owe ordinary income tax on the distribution and a 10% penalty. However, some expenses are exempt from the penalty, so it’s important to consider whether your expenses qualify.
Many investments, like life insurance policies and annuities, may have substantial early withdrawal fees to consider. When you take into account fees or penalties, it may make more financial sense to liquidate a different asset. Work with your advisor and CPA to coordinate a strategy that will reduce the taxes, fees, and penalties you will pay.
4. Get A Second Opinion
In a time of grief, shock, or stress, your decision-making may be compromised and your mental state could be foggy. Unfortunately, there are people out there who take advantage of those who are at a vulnerable point in their life.
With financial decisions, just as with medical procedures, it’s important to fully understand the risks and benefits of any option you’re considering. If you are unsure of the service and advice you are receiving, reach out to other professionals for a second opinion before you make an irrevocable financial choice, especially if you don’t have a relationship with a financial professional.
5. Don’t Do Nothing
While it’s important to take your time when making major financial decisions, and this piece of advice may seem to contradict prior points, there is also a danger in doing nothing. Not taking action can be risky if your assets are invested too aggressively or are losing value. Being paralyzed by fear may only increase your financial stress. Evaluating your options and understanding the risks can help you feel more confident and informed.
If you or someone you know is facing a life crisis, or if you know that your finances are not set up to withstand a crisis, we’d love to help. At ATL Global Advisors, we can walk you through our personalized, high-touch process to reduce your risk, solidify your finances, and prepare you for life’s inevitable transitions. To learn more about how we can help, email me at firstname.lastname@example.org or call 770-800-2851 or click here to book your complimentary introductory meeting.
Kevin Myers is a financial advisor and managing partner at ATL Global Advisors, an independent financial services firm serving transportation and logistics employees in the greater Atlanta area. With more than two decades of industry experience, he specializes in providing private wealth management services to business owners and their families, with the goal of helping them realize their financial dreams. Learn more by connecting with Kevin on LinkedIn.