Could Financial Planning Extend Your Life?

Photo by Annie Spratt on Unsplash

A recent study published by the Journal Of American Medicine found that those who suffered a sudden loss of wealth were 50% more likely to die within the next 20 years than those who remained financially secure.

The study looked at individuals between the ages of 51 and 61. It defined a “sudden loss of wealth” as a loss of 75% or more of net worth over a 2-year period of time. During the following 20 years, those who “experienced a negative wealth shock” were much more likely to die from all causes of death, also known as “all-cause mortality”.

75% is a massive decline and, at first glance, seems unlikely even in the worst-case scenario of a major bear market. Even in 2007/2008, markets dropped “only” 55% and just a few years later were again at all-time highs.

But it got me to thinking. What event or series of events would have to occur to lose 75% or more of a family’s net worth in such a short time and for those losses to become permanent?

It’s tempting to think that a major loss to your net worth could never happen to you. Yet, the truth is that none of us are immune to risk. Sometimes “life happens” (and not in a good way).

Below are 7 things that could wipe out just about anyone’s net worth – including yours.

1. A major market decline. This is the obvious one that worries most investors and retirees. Market declines of 50% or more are rare, but they do happen. They have happened twice in my 25-year career and I expect at least one or two more. To exacerbate the situation, many people are forced to liquidate assets at depressed prices to pay the bills.

A market decline of 50% is one thing. Selling out when markets are down, either out of fear or necessity, virtually ensures that those assets will never recover. If your portfolio experiences another market like we had in 2007/2008 and you must liquidate your stock funds to pay the bills, it’s possible (likely, in fact) that you will run out of money years before you should.

Since market declines are inevitable, it makes sense to diversify assets and be careful to set aside enough in lower risk, non-stock investments to pay the bills even during the worst market conditions. To get an idea of how much market risk is baked into your portfolio, check out my free Portfolio Risk Analysis tool. You will find it on the right hand side of this website, near the top of the page.

2. Loss of a major breadwinner. Imagine the following situation: One spouse works full-time and brings in the biggest paycheck. The other works part-time or is a stay-at-home parent. The breadwinner’s job provides not only the majority of income, but also a retirement plan, health insurance and other financial benefits. The family’s mortgage, car payments, their kids’ activities, retirement goals and dreams of college education are all based on the assumption that one or both spouses will be around to provide the financial resources to make all this happen.

Industry statistics show that 20% of households with kids under age 18 have no life insurance at all, and that the average family has only enough life insurance to cover about 3 years worth of expenses.  If you or your spouse were to die, would you still have enough money to meet your financial goals?  What would the loss of a major breadwinner do to your family’s net worth? How would it effect your family’s long-term financial security?

Check with your financial advisor or insurance agent to be sure you have the right amount and right type of insurance for your needs.

3. Long-term disability or illness. Financially speaking, this can be even worse than the death of a major breadwinner. When a person dies, a life insurance policy often provides a tax-free cash payment to the surviving beneficiary(ies). In the case of a long-term disability, there is no life insurance death benefit because no one has actually died.

Disability insurance benefits may be provided from an employer, but these are typically capped at a percentage of the employee’s base salary or a fixed dollar amount per month. What’s more, these benefits are often taxable.

Social security may provide an additional disability income benefit to your kids and a parent who cares for them, but these benefits can be hard to obtain and are limited in scope. According to the Social Security Administration, the estimated average monthly social security disability payment for a disabled individual with a spouse and one or more kids is $2,051 per month.

In a worst-case scenario, the kind that can wipe out nearly your entire net worth, the primary breadwinner becomes ill or disabled for an extended period, gets terminated from employment (possibly losing any life insurance benefits they may have been entitled to), and then dies. During this time, the family may incur significant expenses related to the illness or disability, suffer a loss of income during this time, and then the breadwinner dies leaving little to their surviving family.

What is your back up plan in the event of a long-term disability or illness?

4. Long-term care related expenses. In 2016, The National Association of Insurance Commissioners (NAIC) and The Center for Insurance Policy Research published a study regarding the need for long-term care insurance and the state of long-term care insurance industry. If you would like to read the entire 174 page study, click here.

For a more reader friendly summary of the research, read MorningStar’s Christine Benz’s article “77 Must-Know Statistics About Long-Term Care”. A word of warning, it’s depressing.

Some standout stats:

  • 52.3% of people turning age 65 will need long-term care at some point in their lives.
  • $3 trillion (not a typo). The estimated lost wages for those who provided unpaid caregiving.
  • More than 75% of unpaid caregivers are women.
  • $217,820. The estimated cost of providing care during the last 5 years of life, without dementia
  • $341,651. The estimated cost of providing care during the last 5 years of life, with dementia.

If you are forced to pay for care by liquidating pre-tax retirement accounts like IRAs and 401k(s), you can expect to experience an even greater “negative wealth shock” after you factor in Federal and state income taxes.

One can argue that these are insurance industry statistics or that I have cherry-picked the scariest stats for this article or that the odds of not requiring care are still in your favor. But no one who has honestly studied this issue can deny that long-term care expenses are a major threat to your financial security in retirement.

Review your long-term care needs, honestly assess the risk, and consider purchasing long-term care insurance or taking other steps to minimize this risk.

5. College tuition. How much you pay for college will vary from family to family. However, $100,000 is what many Minnesota families can expect to pay for a 4-year college education. Of course, state colleges are cheaper. Many private colleges and universities cost much more. But $100k is not an unusual number.

If you are footing the entire bill, consider the opportunity cost that your student’s college expenses represent. If school costs $100,000 today, what would that $100,000 be worth if it was left to grow in your investment account for the next 20 or 30 years?

Assuming a 7% annual average return, your money would double every decade. A $100,000 expense today could be an opportunity cost of $400,000 or more just a couple of decades down the road.

It will take more than college tuition to wipe out most people’s net worth, but what if you have two, three or four kids? These expenses add up and can significantly limit your ability to provide for your own financial security later in life.

To learn how to pay less for college, simply hit the “college” tab at the top of this post.

6. Late stage career change. That’s a fancy way of saying, “You’re fired”.

Job losses are never fun, but for those who find themselves in the unemployment line when they are in their 50’s or 60’s, a job loss or a significant reduction in income can be devastating. Not only can it be harder to find work on comparable pay scale, but a “late stage career change” could mean an unintended early retirement.

Early retirement may be welcome news to some, but most people need to work until they are 65 or older to fully fund their retirement goals. “Retiring” 5 years early is a major game changer when it comes to your retirement plan. It represents 5 fewer years for your assets to grow and 5 more years that your money has to last in retirement.

If you have any doubt, ask your financial planner to run a scenario that moves your retirement age up 5 years. More than likely, you will find that the last 5 years of your career are the difference between never running out of money in your lifetime and going broke decades long before you should.

Review and update your financial plan on a regular basis. Be prepared to retire early even if you plan to work longer.

7. Any combination of two or more of the above. It’s often the one-two punch that knocks out the net worth of even the most financially secure people. While each of the above scenarios is unlikely, they are all possible. The death of a major breadwinner combined with higher than expected college expenses or an extended period of unemployment while going through a bear market may be all it takes to cripple your savings.

Do not despair. As gloomy as these possibilities are, they are not inevitable. In fact, they are probably not even likely. Just because they could happen doesn’t mean they will.

More often than not, families are able to avoid these types of doomsday scenarios. The important thing is to take reasonable steps now to avoid or minimize these risks in the future.

Plan for the worst, but expect the best. A solid financial plan not only projects your future asset values, calculates how long your retirement savings will last, and provides recommendations on how to save and plan for retirement, college and other important financial goals. It also helps families identify and address the major risks to your long-term financial security. Risks like those listed above.

Having the right amount and right types of insurance, adequate cash reserves, a well-diversified portfolio, a plan for managing college related expenses, and other financial planning strategies go a long way towards ensuring that if the worst does happen it won’t result in a life altering, negative shock to your net worth.

So maybe your financial plan deserves another look. According to at least one study, it could add years to your life.