In a financial plan, we usually have two, three or more goals in mind to plan for. When we are starting our life journey, we may want to save for a home, pay down student loan debt and get a better understanding of financial opportunities. As we go further on the journey, our goals might turn towards retirement and exploring what lifestyle our savings can provide. Along that journey, there are roadblocks, detours and some events that may
cause derailment of our plan.
Here are some commonly occurring impactful life events that might derail your financial plan with strategies that help you to be prepared and get back on track.
Unemployment or underemployment: Loss of income can cause a depletion of assets which may not have been projected. While this can be short term and covered by your emergency fund, the actual length of unemployment can have a big impact on your financial plan. You might not be able to contribute to your savings as much as expected. The same can happen with underemployment, which is often accompanied by a material decrease in income.
Solution: Make sure your emergency fund will cover 6 to 12 months’ loss of income and be aware of how much you are spending. Review your spending plan and see where you can make adjustments.
Inflation: Prolonged, higher‐than‐expected inflation generally increases future living expenses beyond expectation. In turn, the size and pace of withdrawals on an investment portfolio increase as well. Even if investment returns are average or typical, this accelerated depletion of investment assets may cause inability to realize goals.
Solution: Review your spending plan and see what costs can be reduced or eliminated.
Large Healthcare related expenses: Certain illnesses or injuries create the need for intensive and prolonged care. While the average rehabilitation and nursing home stay is about three years, there are some conditions that require extensive or extended care without shortening one’s lifespan. While there are insurance policies to cover long‐term care needs, many have limits that reflect a more typical duration of care required. If the cost of such care is much greater than the income for your lifestyle, this will be financially burdensome. Some facilities accept Medicaid coverage to continue care if the patient has run out of money.
Solution: Make sure your healthcare is the best you can afford. Get long term care insurance, this does not only cover end‐of‐life care, but also can be used when you have long‐term care needs after an accident or severe illness. If you are eligible, open a Health Savings Account and make sure you fund it every year. Make sure your emergency fund will cover 6 to 12 months’ loss of income and keep it up to date with your spending. Continue working if you are able, even if it is part‐time.
Children who cannot yet support themselves: Parents who financially support their adult children is a more common scenario than people realize. The problem is compounded when the so‐called “sandwich generation” is supporting their aging parents as well as young adult children who moved home without financial independence. While some adult children may be capable of supporting themselves, they may not be motivated to do so. Others have special needs, which should be considered thoughtfully in their parents’ financial plans.
Solution: Teaching adult children to be financially self‐sufficient is important, but it’s not always a given. It might be considered “tough love” for your kids, but your own financial plans may depend on your adult children having financial independence – as well as building thoughtful financial plans of their own. Have them make a spending plan and figure out how to make ends meet. They can get a part time job if full work is not available, have them contribute to household expenses through housework or gardening or car washing. No free ride, the only way to learn financial responsibility is to pay their own way.
Caring for aging parents: Planning to care for loved ones who didn’t plan well enough for themselves is a challenge. When you’re uncertain how long Mom or Dad might need your financial support, planning is difficult.
Solution:
- The first thing is to discuss this with your parent(s). Help them make a spending plan, look at income and expenses, so everyone understands the shortages. Then you will also know what you need to contribute as support.
- You might be able to manage this extra spending by delaying your own retirement as long as they need your support. If they have a home, you can give them a mortgage against their home. If you cannot afford that, a bank home equity loan might be possible. This is when you should brainstorm with your financial planner and review your own financial plan.
Outliving your money: How long someone will live for is a simple, yet challenging factor that will influence the success of their financial plan. If you or your spouse lives a long time, you will need greater resources relative to your lifestyle (withdrawal rate) to avoid running out of money.
Solution: In your accumulation phase, make the maximum contributions allowed to your retirement accounts. Also, start building or adding to your personal investment portfolio. Manage future expenses through good healthcare planning. Think about downsizing or moving to an area that has better services available for retirement lifestyle. Carefully monitor your spending to see where you need to cut and what expenses you will expect to increase in retirement.
These are some of the situations that can derail your retirement plan. Planning is best done regularly, annually, or if materially different information is available. Make sure you communicate any life/financial changes to your financial planner. Addressing financial situations sooner usually results in less pain and more success.
