“An ounce of prevention is worth a pound of cure.”~Ben Franklin
Turn on the news tonight, you’ll surely be entertained by a host of extremely ordinary catastrophes… robbery, murder, celebrity scandal, 5-alarm fire, and a natural disaster. While the media enjoys plaguing us with negativity and fear, it’s human nature for us to see the positive in the world, especially our own world. When it comes to personal finance, most people have it figured out, or so they think. So, why spend an extra second of our valuable time thinking about what could go wrong?
It is possible one could sail through life without considering protection, and perhaps succeed in the land of make believe. However, it doesn’t matter, until it matters, and then it’s all that matters. This line perfectly summarizes preparation or a lack thereof. As a Certified Financial Planner™, I challenge you to spend just a brief, but regular, moment reviewing your state of readiness. Based on thousands of man hours interviewing clients, here are the top 5 threats to your financial life and corresponding solutions…
—Sick or Hurt– While “it will never happen to me”, it will happen to someone. Over 25% of today’s 20-year-olds will become disabled before they retire[1]. Despite common belief, injuries account for a small fraction of disabilities, whereas musculoskeletal disorders are the most common type of claim (i.e. back pain, arthritis, etc.) followed by cancer[2].
The average disability then lasts for over 3 years[3]. Combine these stats with the fact that less than half of Americans have enough liquidity to cover 3 months expenses and you have a real threat[4]. The most efficient solution is a combination of Group and Individual Disability Insurance, favorably with a True-Own Occupation definition and portability.
—Lawsuit– With over 80% of the world’s attorneys residing in the US[5], we live in a sue happy society. Most Americans would have trouble affording the legal fees on either side of a case, but without proper protection, the losing party will certainly realize financial despair. Liability protection on Auto and Homeowner’s insurance are a critical line of defense. An umbrella policy can go above and beyond these lines of coverage to add more security. Qualified retirement accounts, assets held in certain trusts, and real estate titled by “tenancy by the entirety” are a few other ways to further shield assets. Small business owners must pay special attention to how their business is structured to limit liability. Lastly, always document disputes/complaints and rely on contracts, NOT handshakes.
Taxes– Uncle Sam will always be there to collect his share… federal income taxes, state income taxes, city taxes, property taxes, capital gains taxes, payroll taxes, sales taxes, gas taxes, etc.
—Here’s the thing: Working with qualified advisors and CPAs can help limit this burden. A commonly overlooked issue is the funding of pre-tax retirement accounts to chase current year tax deductions. This is not a tax-savings, but rather a compounding tax-postponement. Retirees often forget or downplay the effect income taxes will have on their retirement distributions. Roth options, post-tax investment accounts, and Cash Value Life Insurance all provide a future tax hedge.
—Market Volatility– The 54% crash in the Dow Jones Industrial Average was only a decade ago, but since then our memory has been blurred by the greatest bull market in history[1]. Much of investing is based on timing. A big loss can become devastating if it occurs during a distribution period. Active management of portfolios and diversification, particularly after the accumulation phase, is vital. Certain annuities can also provide security and de-risking strategies in retirement years.
—Healthcare– Health insurance premiums continue to skyrocket, and deductibles keep going up. This added exposure can be planned for by utilizing a Health Savings Account (HSA) which allows tax deductible contributions and tax-free withdrawals for qualifying expenses. In the same vein, Long-Term Care provides a huge what-if for retirement planning. This issue is so variable and potentially expensive it escapes the scope of this article, but nevertheless requires attention.
In closing, before you give your financial plan the bulletproof stamp of approval, be sure to address each one of these threats on an ongoing basis.
[1] DJI- Historical Prices (10/09/2007-03/09/2009).
[1] Social Security Administration- Table A.
[2] Integrated Benefits Institute- 2017
[3] Council for Disability Awareness- 2018
[4] Federal Reserve Board, pg. 26- 2016
[5] Elocal Lawyers- 2011
[6] DJI- Historical Prices (10/09/2007-03/09/2009).
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