We financial planners and financial writers love to trot out hypothetical illustrations along the lines of “If you save 20% of your income starting at age 40, you’ll be able to retire by your late 60s, assuming an 8% rate of return” — a scenario I wrote about in March. While such projections are necessary for planning for the future, the truth is that they will most definitely be wrong once the future rolls around. There are just too many unknowable variables, such as future investment returns, inflation rates, and tax rates.
However, the unknowable unknowns aren’t just limited to economic variables, as readers often remind me after I write such an article. Here’s a tale a GRS reader told in the comments section after my March post:
In 1996 I had $78,000 in retirement funds and was 32 years old (hubby was 38). Then our home was flooded because a contractor doing a city project made a mistake. While struggling with being unable to live in the house, I was diagnosed with cancer and needed surgery ([we had] no insurance). Within a year I had cashed out the $78,000 to begin rebuilding the house and pay for surgery (we recouped a very small portion of the loss from the contractor). We sold the house and walked away with $11,000 to our name. That was in 1998.
We’ve tried to get back on track, but every time I save, something happens to eat it up: chronic illness, cost of experimental medication, hurricane and tornado damage to home over three years (part not covered by insurance), and more. Life lesson for us: Continue to save because it’s the responsible thing to do. Plan for the future, but be prepared for something to get in the way of those plans.
A sad story with an important lesson: Along your road to retirement, you may encounter speed bumps, fender-benders, road blocks, and perhaps outright tragedies. While many will be unpreventable, the financial fallout can be mitigated.
In this post, we discuss the most common causes of financial derailment, and what you can do to keep your plan on course. While many of the solutions are specific to each particular risk, there’s one line of defense that will protect your financial empire regardless of the method of assault, and that is a big, fat emergency fund. You’ve heard it before, but we’ll say it again: Have three to six months’ worth of living expenses in cash, ready to be deployed when the possible becomes the present.
The decision to acquire disability insurance, which replaces your paycheck in case you’re unable to work, is not as clear-cut. You already have some coverage through Social Security, though the definition of disability is very stringent. You may also have coverage through your employer. If you decide to purchase disability insurance for yourself, you’ll find that it can be expensive and complicated. However, the more your job requires that you be in good physical shape (e.g., traveling, meeting with clients, holding a scalpel, violin, or other tool), the more you should consider disability insurance. Many employers, professional associations, and other groups offer group disability policies, which can be less expensive and easier to qualify for.
Finally, one of the best ways to keep health-care costs down is to be healthy. As much as 70% of health-care costs are due to lifestyle choices — eating too much, moving too little, and putting things in our mouths that smoke, impair, or bear no resemblance to anything in nature.
But it’s not only the unemployed who find it harder to save for retirement. These days, income insecurity also takes the form of stagnant or reduced wages, while the costs of many goods and services keep rising. In many cases, the first item in the budget that gets sacrificed is contributions to the 401(k) or IRA.
As for divorce, it’s not very romantic to plan for your marriage’s dissolution. But if your matrimony is full of acrimony, begin by protecting yourself while still being fair to your spouse. If you’re engaged, a prenuptial agreement can be a delicate topic but a good idea, especially if there are kids from previous relationships.
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