A financial plan that only considers saving and investing may look perfect on paper, but can easily derail and become worthless if any of the following life events occur:
- You die prematurely or become disabled before having saved enough to secure your family’s future needs.
- You live longer than the plan assumed you would.
- Your home is destroyed by a natural disaster or your automobile is totaled in an accident.
- A significant legal judgment is brought against you.
- You end up spending more and/or saving less than the plan assumed.
A truly integrated financial life plan considers these types of risks and mitigates them through lifestyle decisions and the proper use of insurance.
Life insurance and long-term disability insurance can provide protection for your family and ensure the success of your financial plan in the event of disability or premature death. A healthy lifestyle will not only reduce the likelihood of such events occurring in the first place but also make the purchase of life and disability insurance less expensive.
The flip side of premature death or disability is the “risk" that you end up living longer than planned for and don’t have enough money for those extra years. The average 65-year-old is expected to live until age 85, however, one in ten is likely to live past age 95. With a married couple, the likelihood that at least one of them will live past 95 is even greater. The uncertainty of how long you will live can be managed by planning to have an adequate safety margin of assets beyond a reasonable life expectancy and/or using income annuities that will make monthly payments until your death, no matter how long you live. One of the best annuities available is Social Security because its payments are inflation-adjusted and backed by the US Government. Further, making the decision to defer your benefits until age 70 increases the monthly benefit significantly and is one of the best hedges currently available for longevity protection.
Your home and automobiles are likely some of your most valuable assets, but can also be the source of significant liability. Periodically reviewing your auto, home, and umbrella policies to ensure you have adequate property and liability coverage helps prevent your wealth from being devastated by a natural disaster, accidents, and legal claims against you.
One of the biggest lifestyle risks to your plan is spending too much or saving too little. While this risk cannot be mitigated with insurance, in can be effectively managed with awareness and a bit of discipline. Tracking your spending using a tool that automatically captures credit card and checking account transactions (like the one we provide to all clients as part of their planning dashboard) is an easy way to both capture expenses in the aggregate, but also dive into the detail when necessary. Think of it as maintaining your situational awareness, like you do while driving your car by scanning your mirrors and looking out the windshield.
Another way to manage your big picture spending and savings is to update your financial life plan regularly so that you know whether you're on track, ahead of schedule, or falling behind. This is akin to looking at your GPS for traffic updates, estimated time en route, and estimated time of arrival. This information will help you make informed decisions about whether an adjustment needs to be made to your savings rate, investment portfolio, or goals. The earlier an adjustment is identified and implemented, the smaller it will need to be to bring you back on course.
While all of these lifestyle risks have the potential to be devastating, they don’t have to be and can be controlled with proper planning. In fact, they are the risks that are most within your control. By living well within your means, getting the proper insurance, and regularly updating your plan, you can be successful even when unexpected life events occur.