Planning for the Unplanned

Even the best financial plans can encounter unforeseen, and life-altering, obstacles

by Matthew Hoesly, CFP, ChFC, MSFS

Recently, the Million Dollar Round Table commissioned a survey to gauge financial wellness. One of the top reoccurring concerns noted among Generation Y, Generation X and Boomer survey respondents was not having enough money saved in their retirement savings fund.

Quite often, people don’t realize how easy adjustments can help them reach financial security. Are your clients prepared for the unexpected? There are many situations that can throw a solid retirement plan off track but below are four of the most common events that can have a long lasting effect on a retirement plan.

• Death or Illness Typically the most common unplanned events are an unexpected death or illness in the family. This can not only cause people to interrupt their retirement saving, but can also force them to invade their retirement account to pay for those associated expenses. For instance, a married couple receiving social security benefits will lose the lesser of their two benefits when one dies. It could also result in the loss or reduction of other pension benefits if there isn’t a survivor benefit in place.
• Financially Supporting Others An unexpected situation that is becoming more frequent are pre-retirees who are financially supporting both sick parents and unemployed or underemployed adult children. This should be the time when many pre-retirees are saving and have the greatest potential for saving, but often people want to help their children by paying for college or with a down payment on a house. It may be well intentioned but it puts their retirement savings at risk.
• Divorce Divorce is another event that usually has a negative impact on retirement savings. People can have a sound financial plan as a couple but if their assets and income sources are suddenly cut in half, they will be much worse off financially. Add in attorney fees and other costs of the divorce and their retirement options decrease.
• Unemployment Losing a job before anticipated can be another problem. Whether it is due to poor health or changes in the company, it can hit a person twofold. First, their income is gone and they are not saving. Second, they are most likely drawing down on assets earlier than planned.

There are some factors that can alter the assumptions used to project retirement income which have a large impact on retirement security. What if social security benefits are reduced in the future? What if a pension received from a former company gets cut due to a bankruptcy filing? Having a large stock market decline immediately before or after retiring can also be devastating.

How to Insulate Plans

When helping our clients with retirement income projections, we always use conservative assumptions and continually schedule appointments to review their plans.

Too many times, people set up a savings plan and never look at it until many years down the road. Retirement projections and savings plans are a constantly moving target and investments must be monitored to make changes if necessary. It is vital that you encourage your clients to look at their retirement savings.

You will also need to help them make adjustments when they are 10 years away from their expected retirement date. This way, if you have helped them plan correctly, short term market fluctuations shouldn’t completely change their plan. With market fluctuations being fairly common, people want to make sure they have an investment portfolio that is situated, so normal stock market cycles won’t completely throw their retirement projections off track.

Usually, people get more conservative with their investments when they get closer to retirement. On the other hand, they will probably still need some of their money for another 30 years, so they shouldn’t get too conservative because then they run the risk of not keeping up with inflation. There are many ways to save for retirement, including pre-tax retirement savings, ROTH savings, after-tax investments, etc. Clients should diversify their investments, but also their strategies. By having multiple options, they have more control over when to use each investment type and a single change in tax law won’t impact them as negatively.

Importance of Insurance

In order to have a well-rounded financial plan, insurance needs to be a part of the discussion. Many people don’t realize the cost of health insurance, especially individual plans for people in their 50’s and 60’s.

Health insurance is necessary to have because a catastrophic illness could be devastating, and people need to factor this cost in if they are thinking about retiring before they are eligible for Medicare. Once they are on Medicare, the cost of supplemental coverage can be much higher than they expect.

Disability and life insurance coverage are the main cornerstones of insurance. They are there for the unexpected and unplanned events that happen in life. We can’t save enough to cover some of these tragedies that could happen, so that is why people should spread some of the risk to insurance companies who can cover it. Almost everyone buys auto and home insurance, but the financial impact due to loss of life or inability to continue working is usually much higher.

Unless people have enough saved to retire today, they most likely still need to have disability coverage and life insurance for themselves and their family. Having a disability that lasts more than three months is more common than most people realize.

A survey conducted by the LIFE Foundation found that you have a 3 in 10 chance of suffering a disability that will keep you out of work 90 days or longer. A prolonged injury or illness can create a hole that is very hard to dig out of. Sometimes a serious disability during your 20’s or 30’s can set you back your entire life. If you are closer to retirement an unanticipated health issue might force you to retire sooner than you expected, so money must be saved, even if people plan on working forever.

Pre-retirees should also think about purchasing long-term care insurance. This will usually pay if people need help with the normal activities of daily living. Skilled nursing care can be extremely expensive and cause many to use their retirement savings much quicker than they planned for. There are many options available on policies today and most cover costs for care in home. Having this coverage helps take some of the pressure off their surviving spouse and children, so they can focus on enjoying the time they have with one another instead of constantly worrying about their care.

People can’t plan for everything, but that’s not an excuse to ignore finances either. A lot of people who have not planned well, will harm themselves further by continuing to ignore their circumstances. Small positive changes can have big impacts in the future. It’s important for us as financial advisors to remind people it is never too late to start improving and actively monitoring their financial life.

This article is intended for informational purposes only and should not be construed as a recommendation to purchase or sell any security or securities product. Securities offered through Ceros Financial Services, (Not affiliated with Resource 1, Inc.).1445 Research Boulevard, Suite 530, Rockville, MD  20850.  (866) 842-3356   Member FINRA/SIPC