By FPA member A. Christopher Engle, LUTCF, CFP®, ChFC®, AEP®
Last Updated: February 13, 2012
In general, humans are very positive and optimistic, which is great. It allows you to enjoy your careers and families and dream of your lives improving for both yourselves and your children. While this confidence serves you well most of the time, it can make you uncomfortable when you think about unexpected life changes such as a job loss, serious illness or death, or divorce. Whenever something makes you uncomfortable, you may procrastinate or avoid it all together. It is unthinkable. Stop squirming. It’s time to get over it and take action.
First, you have got to come to the realization that life happens. Most of us know someone who had a seemingly secure job become a casualty of the recession. Also, while your grandparents may have lived into their eighties, this is no guarantee that you are immune from illness or an accident. The more you prepare your contingency plan, the better you will weather these storms and emerge with your financial plan intact.
Second, ask yourself some tough questions:
- How long can I pay my existing bills if I lose my paycheck?
- What expenses could I cut if I lost my paycheck?
- How long do I get paid if I am sick and unable to work?
- How much of my income do I get if I am sick and unable to work?
- How long would I have my group benefits if I were sick and unable to work?
- What are the financial obligations if I were to die unexpectedly?
- How much income would my family need to maintain the existing household?
- How long would my assets last if I need long-term medical care?
- Would my spouse have adequate income if I need long-term medical care?
Write your answers down and be realistic. Is it realistic to think that a 60 year old who has been out of the workforce for 20 years would find a ready job market for their skills? Is it realistic to think that you would downsize your family home or cash in your retirement plan to pay current expenses? Probably not.
Third, develop a contingency plan. Your plan should be incorporated into your day to day financial decisions. If you build your financial plan with the contingencies in mind, it will make you less susceptible to the financial fallout of a life event. Those that have high mortgage, auto, and credit card debt are at greater risk due to loss of income. As you make these large important financial decisions, ask yourself what happens if…
Establish an emergency fund of approximately six months of living expenses. This fund will provide cash flow for short-term income loss and protect your retirement investments from the penalties and expenses of cashing out. Also, it will protect you from creating more problems by using your credit card for emergencies.
Evaluate your insurance. Are your life insurance benefits adequate? How much of your life insurance is tied to your job? Consider obtaining a personal policy that provides adequate coverage for your needs.
Do you have insurance that replaces your income if you become sick or hurt? A good disability policy should replace at least 60 percent of your income for several years at least. Do you know if your benefit would be taxable? Some group plans provide benefits that are taxable when received. This could create an unexpected shortfall in income when it is needed. Consider supplementing your group plan with an individual policy to make up the difference.
If you are nearing retirement, you may want to consider a plan to cover long-term medical care needs. Even a well funded retirement account could be depleted in a short time if you or your spouse needs this care. Will your existing retirement plan cover the costs of the care and still provide a lifetime income to the healthy spouse?
Update your estate planning documents such as wills and trusts to make sure they reflect your wishes. They should also provide instruction for your loved ones in case you become incapacitated and are unable to provide guidance.
All this planning sounds overwhelming, especially since we are thinking about the unthinkable. A visit to a qualified CERTIFIED FINANCIAL PLANNER™ professional will help make sure you cover all of the contingencies. They will review your unique situation and help you develop a plan that meets your specific needs. What had previously been uncomfortable and stressful now gives you more confidence to enjoy your life knowing that you have a solid backup plan.
FPA member A. Christopher Engle, LUTCF, CFP®, ChFC®, AEP®, is a partner with Argus Financial Consultants in Grand Rapids, Mich. Securities offered through LPL Financial, Member FINRA/SIPC.
The opinions voiced in this material are for information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial adviser prior to investing.