I recently spoke with some family members in the Northeast who lost power during a big storm that rolled through. It took them four days to get power back. While they were able to get by just fine, it got me thinking about the importance of being prepared for emergencies. I know I’ve talked about such preparation in the past, but I feel like it’s something that should be brought up from time to time as it’s very important. As you plan for the future and set goals, make sure you are also preparing for the unexpected. That means having an emergency fund saved up or having a plan for divesting particular assets as a way to pay for unexpected expenses (i.e. medical bills, emergency home repairs, etc.). Having an emergency fund or emergency plan can go a long way towards protecting your nest egg and keeping you on track to meet your goals. Many people don’t think to build up an emergency fund and thus put all their hard work and savings at risk and don’t truly realize it. If you don’t have one, don’t worry, it’s never to late to start saving for an emergency. If you need help getting started, you should speak with a certified financial planner or wealth manager. So, are you prepared for an emergency?
According to a recent study by the Treasury Department and the Joint Commission on Taxation, for every dollar that Americans under the age of 47 save for retirement, they withdraw 20 cents before reaching age 55. That may not sound like much, but that a fifth of a dollar. Furthermore, a 2019 report by the Government Accountability Office found that Americans during their prime working years withdrew almost $70 billion annually from retirement accounts–that is, before they reach retirement age. That’s a lot of money. I get it though, that retirement money can be tempting, especially if times are a bit tough. As the studies point out, many people don’t have the self control necessary to avoid tapping into their retirement accounts early. However, I strongly urge you to not be one of the people that fits within those studies and taps your retirement accounts too early. Ideally, you have some sort of emergency fund or financial plans to cover an emergency. I understand, though, that life can be unpredictable and an emergency can be costly, especially a medical emergency. Thus, tapping into your retirement savings should be an absolute last resort. Furthermore, there are penalties associated with early withdrawals if they do not fit within certain exceptions, which is even more of an incentive to not touch your retirement savings before you absolutely need to. If you need help with planning for a potential emergency or you want to avoid tapping into your retirement savings too early, you should speak with a certified financial planner or wealth manager.
You may not realize it, but insurance can be an important part of building up your wealth. Think about it for a moment. Insurance helps to protect your assets and your health and allows you to avoid having to spend tons of money should anything happen to your assets or health. For example, sudden health emergency–such as something as common as a broken bone–can be quite expensive and really eat into your savings and can be difficult to recover from. However, if you have health insurance, that amount coming out of your pocket is reduced based on your premium and the impact on your finances is lessened. In looking past your health, insuring your assets (i.e. your home and car), can do the same thing. A car accident or a storm that causes damage to your home can be just as expensive as a medical emergency. Now, chances are you are well aware of the importance of insurance and, if you are a responsible adult and consumer, you’ve already insured your property and health. But it’s important to realize–and for me to reiterate–that by having insurance, you are also insuring your wealth. You are taking an important step towards protecting the nest egg and the money you’ve saved by making sure it doesn’t get sucked into an emergency expense. You are making sure that some of the costs of life don’t take away from the hard work you’ve done of saving for your present and future. Of course, if you realize that you don’t have insurance or your insurance is lacking, don’t worry. Take the time to either purchase the insurance you need or look into changing your level of coverage.
Life can be unpredictable. Do you know how you will handle that unpredictability? For example, if you were faced with a sudden, substantial medical bill or your home was damaged in a storm, do you know where the money to pay for those expenses will come from? If you’re financially savvy/smart, you probably have an emergency fund set aside to help with those expenses. However, if you don’t have such money set aside or the costs are more than your emergency fund, you may need to find other financial resources to tap into. While I strongly discourage it and will only suggest it as an absolute last resort, taking an emergency withdrawal from your retirement funds is a potential option. I want to remind you, again, that taking emergency withdrawals from your retirement account is highly discouraged and should only be done under the rarest of circumstances. It’s also important that you at least understand the rules and consequences of taking a hardship withdrawal. First off, you will want to see if your retirement plan even allows hardship withdrawals. Most 401(k)s and IRAs allow for hardship withdrawals, but there may be specific guidelines you will have to follow. You will also need to ensure that the expenses you intend to use the money on qualifies as a “hardship” as defined by the plan rules or custodian. Many plans have a list of such events that automatically qualify (i.e. certain emergency medical procedures, required home improvements, etc.). Be aware that there will be tax consequences to a hardship withdrawal if coming from somewhere that isn’t a Roth IRA. You may even get hit with an early distribution penalty, depending on your age when you make the withdrawal. You will also need to make sure that the withdrawal is only for the amount of the expense and nothing more. Before you make a hardship withdrawal, you need to show that you have no other options as well, which may require opening up your financials to scrutiny. These are the main things you will need to be aware of, but there may be more depending on the retirement plan you want to take money out of and your personal situation. Taking a hardship withdrawal can be a tricky transaction that can open you up to serious penalties if not done correctly. If you are considering a hardship withdrawal, you will want to speak with a certified financial planner both to decide if the move it right for you and also to make sure that you do it correctly should you decide to do it.
Could you weather a financial emergency given your current savings? Where would the money come from to cover something such as unexpected medical bills or a necessary home improvement expense? In such situations it can be tempting to divert money ear-marked for your retirement savings towards those unexpected bills. Yes, such a move will provide short-term relief and provide you with the needed funds, but in the long-term impact can be quite substantial. First off, don’t forget that the money you don’t put into your retirement account won’t have an opportunity to grow (i.e. through investments) and won’t be there later, when you need it. Secondly, if your employer offers contribution matching, you will be missing out on extra money being put into your account. Employers won’t match if you don’t make any contributions of your own. Furthermore, if you are decades away from retirement, those matching contributions could add a nice chunk of money of your retirement savings without you having to do anything. While it might be tempting to stop making contributions for a short time–like a few months–with the belief that such a move won’t have a big effect, you should really avoid such thinking. Any suspension of contributions to your retirement savings should only be done as an absolute last resort and should be avoided at all costs. The key to retirement saving is being consistent with saving. If you do find that you need help with arranging your finances to cover an unexpected expense or want to just have a plan in place to cover an emergency, you should speak with a certified financial planner.
Over the past few weeks, those in the Carolinas and the Gulf Coast have been battered by massive hurricanes. The damage wrought by these storms has been extensive and will most likely take years to rebuild from. It’s times like these that remind you of the importance of having a plan in place to handle sudden emergencies, particularly the unpredictability of Mother Nature. This means having a plan in place not only to save yourself and your loved ones, but also to protect your finances and your future. If you live in an area that is prone to tornadoes, hurricanes, wildfires, or floods, you need to think about where the money will come from to rebuild and continue living after Mother Nature strikes. You may want to ask yourself some key questions, such as: Do you have proper insurance coverage? Do you have an emergency fund to help pay for basic essentials and to keep you on your feet? Will you rebuild where you are or move elsewhere? How much of your retirement funds are you actually able to use to help you rebuild? The answers to these questions should provide a good idea as to whether you need to re-think your retirement savings plan as well as your overall financial plans. You don’t want to wait until a catastrophic weather event actually knocks you out to make the changes that you need to make to protect yourself and financial well-being. Furthermore, if you don’t have plans for where the money to rebuild will come from, you will most likely have to turn to your retirement funds, which will most likely deplete your savings and alter your retirement plans. This is also a good time to research what government assistance may be available and have an idea as to what programs you will most likely apply or seek help from. If you have questions about how to form a plan to protect yourself and your nest egg, you should speak with a certified financial planner.
When it comes to saving for retirement, IRAs and 401(k)s get lots of love. They’re the two accounts that get talked about the most and, as a result, tend to be the most common accounts that people use when saving for retirement. While they are a great way to save for the future, they shouldn’t be the only accounts used when saving for retirement. Just like when it comes to investing, you should consider diversifying where you save your money for retirement. Yes, you should use accounts such as IRAs and 401(k)s to do so, but you should also save your money in non-retirement, taxable accounts that allow you access to your money before you reach the required age for IRA and 401(k) distributions (usually age 59 1/2). Having such accounts will allow you the ability to reach money should you need it, instead of having to take early distributions, which can often lead to IRS penalties. While you should only take money out of such accounts as an emergency, it can be comforting and practical to have a buffer to allow you access to emergency funds. If you have questions regarding non-retirement, taxable accounts, you should speak with a certified financial planner who can provide tips and suggestions regarding what type of accounts to set up and how much of your retirement funds you should save into such accounts.
Medical expenses are one of the biggest retirement savings killers. All it takes is one unplanned medical emergency or issue and the savings you worked so hard to build up can be decimated or your retirement plans left greatly altered. Thus, along with your finances, you should also be thinking about health insurance in retirement and how you plan to cover yourself once you stop working. This will require exploring Medicare options as well as possible employer options (i.e. if it is part of a retirement package or retirement benefits). As part of that process, you will want to determine what those insurance costs will be and how that factors into your retirement savings. If you have questions regarding saving for retirement, you should speak with a certified financial planner.
You can’t predict the future. You can plan and save all you want, but one emergency or unexpected issue can derail your retirement plans pretty quickly. This isn’t meant to scare you, but rather to get you thinking about the unexpected and how to take the steps to help prepare yourself. One of the easiest ways to prepare for sudden emergencies is to have a plan in place. You should have plans set for your physical, mental, and financial health in retirement. Taking the time to discuss and set those plans into writing can help to avoid problems, keep your mind at ease, and make sure you are well cared for during your retirement years. You may also want to review your finances and take steps to either consolidate your money (if you have multiple retirement accounts) or to know where you will take money from in certain situations (i.e. medical expenses, living expenses, etc.). While nobody can predict what the future holds, you can take action now to help blunt any potential issues or emergencies.
Have the recent weather events in Florida, Puerto Rico, and Texas made you rethink your retirement plans? If you were planning on retiring to a place on the coast, do you worry about the possibility of bigger and more powerful storms causing damage to your dream home or property? While it’s impossible to predict future weather and climates, you can take steps to protect your investments and dreams. For example, if you are building in an area that often gets hit by hurricanes, you may want to incorporate building materials and best-practices that go above and beyond local building codes to protect your new home. Another good idea is to have plans in place for such weather emergencies (i.e. evacuation plans or plans to visit family in another part of the country). Whether or not you believe in climate change or consider the recent weather activity to be an anomaly, you can and should take steps to protect both your retirement and your retirement investments.