Whether it’s a hurricane or flood, an accident or illness, or even a market crash, a disaster could lead to a financial setback that will be difficult to recover from, especially for retirees living on…
Whether it’s a hurricane or flood, an accident or illness, or even a market crash, a disaster could lead to a financial setback that will be difficult to recover from, especially for retirees living on a fixed income.
Retirees are filing for bankruptcy in record numbers. One in seven bankruptcy filers is age 65 or over, a five-fold increase over the past two and a half decades, according to a 2018 Consumer Bankruptcy Project report.
Adding a disaster to an already delicate financial situation can easily put retirees over the top. “There are lots of ways you can lose money to different risks,” says Dave Totah, a financial planner at Exencial Wealth Advisors in Frisco, Texas. “Your home can burn down, you can be in an auto wreck or you can get sued. You can at least try to cover yourself in most areas. For the areas you can’t cover, how do you lessen the risk?”
Here’s what financial advisors recommend to help prepare for and survive a disaster.
Have an emergency fund. The first thing you need to do is establish an emergency fund. Totah says if only one spouse is working, you should have at least six months of living expenses. If the household has two incomes, you should set aside enough to cover three to six months of expenses.
An emergency fund is especially helpful after a disaster if you need repairs to your home. If you don’t have the cash, you may have to wait. “If you have damage and need to get it repaired, people will not want to wait 90 days for an insurance check,” says Jay Lloyd, a financial advisor at SignatureFD in Atlanta. “People need to be paid immediately. Otherwise, you may be put to the back of the line.” If you can cover six months of expenses, you can hopefully be reimbursed in that time.
Even if you have excellent insurance, you may need cash to pay the deductibles. “If they have huge trees and only have $1,000 worth of coverage, they will have to have money set aside to pay for those costs. If a hurricane hits, you may have a wind deductible. It’s usually a percent, 2 percent to 5 percent, of the dwelling value,” says Maria McCool, a partner at Signature FD. “If there is a flood policy, there would be a deductible. If a tree hits your car, that’s a separate deductible. You have to have the emergency cash to pay out these deductibles.”
Some housing developments might share the cost, but it will probably eventually be passed along to homeowners. “If you live in a gated community, the homeowners association may do the cleanup, but it will be charged back to the homeowners,” McCool says. “That’s another hit that [you] may have to pay.”
2. Make sure you have the proper insurance. Life insurance, homeowners insurance, auto insurance, health insurance and disability insurance can help you make it through some of life’s most challenging moments. Some of these benefits might be provided through your job. “Make sure you know what risk exposures are and what’s in place to help you mitigate that risk,” says Rich Ramassini, senior vice president at PNC Investments in Pittsburgh. “The problem with disasters is we tend to take the, ‘It won’t happen to me’ approach. By accepting risk, you accept the full loss.”
Totah says many people go for the minimum coverage when it comes to insurance. “It doesn’t cost much more to have maximum coverage,” he says. “You want to have good coverage on automobile insurance. You want good protection for homeowners insurance.”
States have different requirements for minimum coverage. “Read your policy. Understand what it covers and what it doesn’t cover,” Totah says. “You can get riders and add on coverage. If you don’t know, ask your agent.” Also, consider umbrella coverage. “It covers liability on everything that exceeds the limits on your home and auto policies,” Totah says.
3. Be organized. Make sure you know how to locate all your pertinent documents, including your insurance policies and advance health care directive. Also, give copies to a loved one. If your documents are washed away, reach out to the people or companies that administer your mortgage, credit card, student loan and credit cards. “Contact anybody you pay monthly payments to and let them know you were in a disaster and see what services they can offer for postponing payments,” Lloyd says.
Also, if one spouse or partner handles the finances, make sure the other person knows who to contact for legal or financial matters. “If you don’t know who these people are, you will have a tough time,” Lloyd says.
4. Take out the emotion. Don’t make important financial decisions while you are emotional. “We have an emotional response to disaster, whether it’s sickness, death, a hurricane or tornado,” says Ramassini. “People generally make bad financial decisions when they are in a highly emotional state. Separate that and take a more fact-based approach to the situation.” It can help to talk to a financial advisor outside the disaster area. “Enlist the help of a professional or someone who is an arm’s length from the disaster,” Ramassini says.
5. Pay yourself back to prepare for the next emergency. Whether you draw down your emergency fund, borrow from your 401(k) or take out a home equity loan, you need to figure out how to pay yourself back. Make payments to yourself every month to get the emergency fund back to where it should be. You may have to cut expenses, eat out less and take your lunch to work. “We have to get back on track,” Totah says. “You have to cut back or get additional income. Try a part-time job or a loan from a relative.”
Avoid a 401(k) or IRA distribution unless you have no other options. “If you are younger than 59 1/2, that is an option, but not a really great option,” Totah says. Because of taxes and penalties, “you sometimes end up paying 40 cents on the dollar” to get access to your money.
You may need to reconsider your retirement timing. “If something happens that alters your situation so drastically that you won’t be able to recover, reset your expectations, goals and priorities,” Ramassini says.
People on fixed income don’t have many options to recover their lost savings. “That’s why it’s so important to have an emergency fund. You want to have cash in the event of a disaster,” Totah says. “For retirees it’s more important because you don’t have wage income and you might not be able to work.”