Are you prepared to handle a financial crisis — 6 out of 10 Americans age 40 to 79 have experienced at least one, according to a new piece of research from AARP financial. What sort of crises? Job loss, divorce death of a spouse or a child, sudden illness. (Personally, at 44, I’ve gone through three.)
Unfortunately, most of us don’t prepared for these crises before hand – and then make some wrong early moves when they actually hit.
Q: How unprepared are we?
A: According to the study, out this week, that depends on which crisis we’re talking about.
51 % were unprepared to deal with job loss
44 % were unprepared to deal with the disability/serious illness of a child
42 % were unprepared to deal with disability/serious illness of a spouse
35 % were unprepared to deal with divorce
And the mistake we make is turning to our nearest and dearest. Friends and family may provide the shoulders we want to lean on, but don’t often have the correct answers. Yet that’s where we go.
Q: We think of these as life catastrophes. You say they’re financial ones?
A: Absolutely, and the sooner you start to think of them in that regard the better off you’re going to be. 60 percent of Americans who experienced a long term job loss reported a significant impact on their finances. 50 percent said the same of a serious illness. We already know that health events are the things that drive the most Americans to bankruptcy. And divorce is the dissolution of a business partnership as much as it is an emotional ones.
Q: And you say women get the worst of it?
A: I say it, and so does the research.
65% of women vs. 49% of men were likely to have had a crisis
66 % of women vs 49% of men suffered a significant financial impact because of job loss
46 % of women vs 17% of men suffered a significant financial impact because of death of a spouse
Q: So let’s talk about what you SHOULD do, knowing that the likelihood is one or more of these crises will eventually head your way – and in case one does.
1. Job Loss is crisis #1 these days with the unemployment rate rising to 8.1% in February, and according to yesterday’s jobs number 669,000 jobs lost last week (up 12,000 from the week before). What do you have to do to prepare for the possibility that this could happen to you.
• Be realistic. You may feel as if your job is secure. It may all be a mirage. With the economy in turmoil, your best defense is a good offence. If you are not networking, not polishing your resume, not considering a sideline business just in case, you’re kidding yourself.
• Stop spending. There is one thing you need to get you through a long and extended layoff: Cash. The key is to raise some without raiding your retirement accounts, maxing out your credit cards, and depleting your home equity. That argues for doing the thing we’ve been talking about for weeks, beefing up that emergency cushion by taking an axe to all unnecessary expenditures. Jeff Yaeger said early this week you could save $20K this year by eliminating your cell phone and other major moves. You may not want to do it. You may have to.
• And if it happens: Look into continuing your insurance at group rates, negotiating your severance package, whether or not you have to repay loans from your retirement plan and whether or not you can use accrued vacation time to extend your unemployment benefits.
2. Disability. According to the survey, 84 percent of people under 60 have life insurance, yet only two-thirds have disability. That’s a risk because disability or serious illness ranked second as a financial hardship.
• Know what you have. A number of employers still offer disability insurance their menu of benefits. You should know what you have in terms of coverage and consider extending your benefits with gap coverage. Many people don’t do this because it’s expensive. But you can bring the cost of disability insurance down by waiting 90 days for benefits to kick in.
• If it happens. Look into whether you have paid time off – i.e. sick leave – that you can be paid for. You may be eligible for workers compensation if it happened on the job. Make sure you continue your health insurance coverage because it can be much harder to get if your coverage lapses – especially following a disability and what you have may be now considered a pre-existing condition. Look into whether you qualify for disability benefits through the Social Security Disability Insurance program (it depends on the number of years you contributed to social security and your wages.)
3. Longterm Illness.
• Many of the same things that apply in the case of disability apply here, including the importance of maintaining your health insurance policy.
• Consider other sources of income. If the illness prevents you or a spouse from going back to work, you’ll want to start to look into other sources of income above and beyond SSDI. Are there businesses you could start from home? Would your former employer work out a flexible arrangement?
• In the case of a child’s illness or disability, it is important to speak to an estate planning attorney about setting up a special needs trust. You want to put aside funds for your child but do it in a way that it won’t impede your child’s ability to get state assistance. This typically means one or more special needs trusts. Professional help is a must here.
• Assert your financial independence. Even if you’re married, you should have a degree of financial independence – that means your own checking account, your own credit cards, your own knowledge of your credit history, your own retirement accounts (a spousal IRA if you don’t have a work-based retirement plan). Why? Because even if you believe that your marriage will last forever, divorce is not the only thing that can take it away from you. Women outlive their partners by an average 7 years and as a result 95 percent of us will have to manage the money at some point in our lives. Too many don’t know how.
• If it happens: Do a reckoning. How much are you working with in terms of income and assets. What are your monthly expenses? Could you pay them based on your income alone. As you go through the process of a divorce, it’s really important to approach it as the dissolution of a business. Don’t accept an asset (like the house) without considering whether you have the income to support it. Be careful of joint debts. Even if your former spouse says he or she will pay them, they are considered joint debts if accrued during a marriage. You will be on the hook for them if that ex-spouse defaults.
5. Death of a spouse
• Again, just like with divorce – the fact that death generally hits one spouse before it hits another is THE reason to maintain financial independence through a marriage. You BOTH need to know where the money is. All of the bullet points above about your own credit, bank account, retirement accounts applies.
• Know where the important papers are. At the very least, know where the will, living will and durable powers of attorney are kept – keep a copy at home not just in the safe deposit box – so you can access them quickly.
• When it happens – there are people you’ll need to call. Your spouse’s employer, banks and brokerage firms, insurance providers and your own lawyer and tax advisor. That’s just the first step, but these people will get you on the road.