It happens. You’ve done all of the right things to save for retirement, like contributing heavily to your 401(k), putting money into an IRA when you could, budgeting so you could watch your cash flow, and salting extra money away from time-to-time... and then along comes an unexpected life event that derails all of your planning. An emergency fund can help you brace for financial impact, but it'll run dry before you know it.
Hopefully, if this has happened to you, you can still recover and still maintain your standard of living in your later years. If you’ve been fortunate enough to avoid financial devastation, the following information may save you from the perils of unexpected events that can ruin your retirement plans.
What are these unexpected events that you need to be aware of and safeguard against? Let’s look at four of them to help you prepare for the worst.
Americans once lived through the Great Depression and watched their life savings be wiped out almost in the blink of an eye. Nearly 100 years later, the world has experienced a pandemic that has led to The Great Recession in America, which has led to millions of people losing their jobs and depleting their retirement savings to pay their rent and put food on the table. And in-between these two major financial calamities Americans faced, there have been numerous other financial crises that also led to many losing their life savings.
When the U.S. economy is chugging along, and you’re watching your nest egg grow, it’s easy to become complacent and think that stocks will only continue to go up in value. Before each financial disaster in America, people thought the same thing. But what they experienced was a very rapid turn of events that caused the stock market to come crashing down and erase all of the savings and investment gains that they had planned on funding their retirement.
It’s indisputable that an economic downturn will come upon us again. Maybe next month, maybe next year – maybe tomorrow. How can you protect yourself and minimize the losses you’ll suffer? The answer may lie in one word — diversify. By not putting all of your eggs in one basket, namely stocks, you can better protect your retirement savings. Bonds, annuities, cash value life insurance, real estate, cash, CDs — these are other options you have, in addition to having a portion of your retirement funds in the stock market. Investment diversification is critical to protecting yourself against the unexpected.
[ Related read: How to prepare for a recession ]
Studies estimate that over two-thirds of all bankruptcies are tied to medical events. Cancer, heart attack, and stroke are just a few of the more than 30 illnesses that are classified as “critical.” No one plans to suffer from poor health; it’s another unexpected life event that can wipe out your retirement savings.
You can provide a measure of protection by having a healthy lifestyle. Not smoking, moderating alcohol intake, having a healthy diet, and exercising regularly are a few of the things you can do to reduce your chances of experiencing a major illness.
You also want to be protected by having the right types and amount of insurance coverage. Having a comprehensive major medical insurance policy is the best financial protection you can have against illness. Even if you have to select a high-deductible health plan, it’s a better alternative than having no protection at all. Prolonged cancer treatment can run into hundreds of thousands of dollars in medical expenses and lead to financial devastation that will wipe away years of saving for retirement.
Having a critical illness insurance policy is also another measure of protection that’s good to have in place. CII policies are designed to pay you a cash benefit if you suffer from a critical illness like those described above and others named in your policy. This money can pay for deductibles, co-payments, expenses not covered by your major medical policy, and a host of other costs you’ll incur from you or a loved one having a critical illness.
According to U.S. News & World Report, the national annual median cost of long term care now ranges from $102,200 for a private room in a nursing home to $19,500 for adult day health care services (based on five days per week per year), according to the Cost of Care Survey 2019 by Genworth Financial. A semi-private room ran $7,513 a month, or $90,156 per year.
Medicare doesn’t cover long-term care costs, and you have to spend all of your assets, including the money from the sale of your home, before Medicaid will pick up any of the costs. Everything you’ve saved for retirement would need to be spent. And at today’s cost of care, it would go quickly.
The best prevention for this is a long-term care insurance policy. Like any insurance, it gets more expensive as you get older, so it’s best to get it as soon as you can. Long-term care policies aren’t inexpensive, but they’re a much better option than losing all you’ve saved for your golden years.
According to MDRT, about 30 percent of Americans age 35-65 will suffer a disability lasting at least 90 days during their working careers, and about one in seven people ages 35-65 can expect to become disabled for five years or longer. You may feel perfectly fine today and find yourself unable to work tomorrow. A disabling illness or accident can occur at any time.
But your best protection against financial ruin from a disability is a long-term disability policy. These policies are specifically designed to pay you directly when your paycheck stops coming. If you become disabled, you’ll still need to pay your mortgage and all of your other living expenses; without disability insurance, you’ll be depleting savings and retirement accounts to meet your obligations. Why risk your retirement savings when you don’t have to?
When you retire, you’re going to want to travel and maintain the same standard of living you’re accustomed to. Your retirement savings is the engine that’s going to take you where you want to go in your golden years. Unexpected life events can throw you off track and ruin all of the years of diligent saving for the retirement you’ve worked so hard for. It’s not too late to take steps to minimize the impact of the curveballs life will eventually throw at you.
Jack Wolstenholm is the head of content at Breeze.
The information and content provided herein is for educational purposes only, and should not be considered legal, tax, investment, or financial advice, recommendation, or endorsement. Breeze does not guarantee the accuracy, completeness, reliability or usefulness of any testimonials, opinions, advice, product or service offers, or other information provided here by third parties. Individuals are encouraged to seek advice from their own tax or legal counsel.