Using Buffer Assets to Address Short-Term Cash Flow Risks

In my last article I asked an important question: Will a recession wipe out your retirement?

?If the market plummets, one of the things that can make a bad situation worse is having to sell assets to cover your cash flow needs at a time when the value of those assets is way down. This depletes your portfolio and gets you even further behind.

The way to avoid that scenario is to have buffer assets in your portfolio.

Wat are buffer assets?

Buffer assets are assets that you can access to cover your short-term cash flow needs when there’s an issue with your usual source of income. Buffer assets provide a buffer against a number of risks, such as:

• ?Market risk (the risk that the stock and/or bond market will decline) – If you’re retired, buffer assets give you money to live on that doesn’t involve pulling money out of your portfolio when the market is way down.
• Employment risk (the risk that you’ll lose your job) – If you are not yet retired, buffer assets can pay your bills while you look for another job.
• Health risk (the risk that you’ll require long-term care) – Even if you have good long-term care insurance, that insurance usually doesn’t kick in for the first 90 days of the problem. Buffer assets can help you pay for the cost of care during those 90 days.
• And more

Start with an emergency fund

The number one buffer asset that everyone should have is an emergency fund. You want to have enough cash in the bank to cover at least three to six months of living expenses. If you agree with many experts and think we’re about to enter into a major recession, you may want an even larger emergency fund than this.

Then consider other buffer assets as well

In addition to an emergency fund, other potential buffer assets include:

• Annuities – Guaranteed income annuities provide guaranteed income regardless of what’s happening in the market.
• Cash value from life insurance – If you have what is called “permanent” life insurance (vs. “term” life insurance), your policy may have built up a cash value that you can access.
• Home Equity Conversion Line of Credit – This is a line of credit that can be set up when you create a reverse mortgage.
• Home Equity Line of Credit (HELOC) – This is a type of loan that you ideally apply for before you need it. A HELOC is based on the equity that you have in your home. Once you are approved, you can access the funds (i.e., take out the loan) whenever you need to during the loan period.
• Precious metals – Gold, silver or platinum can hold their value during a financial downturn. However, for precious metals to be an effective buffer you need to physically take possession of them – you can’t just buy shares of a precious metals fund. Be aware, though, that when you go to sell these assets you’ll have to pay a fee to cover the cost of proving that your precious metals are real.

Of course, there are pros and cons to each of these potential buffer assets. As a certified, educated professional financial advisor, I can help you sort through the options and determine which are best for your specific situation.

Give me a call (949-309-9962), or click-here to set up a 15-minute call to learn more about Buffet Assets.?