Monday, March 21, 2011

Create Your Personal Protection Plan

Saving safeguards: How to avert financial disaster

By John F. Wasik (Reuters)

An elderly man sits on a chair among rubble in Kesennuma City, Miyagi Prefecture, in this picture taken by Kyodo News on March 18, 2011. Mandatory Credit REUTERS/KyodoThe Japanese tsunami and nuclear disaster has triggered a lot of serious thinking about personal disaster planning.

While my hopes and prayers are with the Japanese people as they attend to their needs and recover, it’s an ongoing reminder that we have to consider and plan for worst-case scenarios in our own lives.

Protecting against a disaster requires financial triage. Most of us never think about the need to do this until faced with a life-changing event. The single-best “first responder” safeguard against all kinds of catastrophes is a combination of adequate savings and insurance.

You need a protection plan in case a Black Swan (rare but troubling) event hits your life. In one year, my family experienced serious illness, major loss of income and lightning hit our house. What are the odds of that happening?

Fortunately, I was doubling our normal monthly savings two years prior to our annus horribilus. Although the rate of return was practically zero, I kept cash in a liquid but safe money-market mutual fund. That way I could cover at least a year’s worth of mortgage, property taxes and the basic deductible for our health insurance plan (almost $6,000 at the time). I also had enough to cover the out-of-pocket amount for our home insurance policy ($1,000).

A brief note on insurance: Don’t sweat the small stuff. You want to cover huge bills like serious illnesses and accidents along with catastrophic losses like house fires. Several of my neighbors have been scorched after lightning strikes (one couple had no home insurance and had to spend all of their savings).

Higher deductibles will lower your premiums, but make sure to cover major losses that are annually adjusted to inflation.

One policy that I was tempted to cancel but glad I have is disability insurance. This covers you in the event that a severe disability prevents you from earning income. If your employer offers this coverage, take it. There are two kinds: short-term (for a temporary disability), and long-term (permanent).

I’ve known far too many people who’ve been disabled by strokes, heart attacks, surgery and cancer. If your household would suffer greatly from loss of income due to disability, you need to buy this policy before life insurance. While pricing disability coverage on your own is expensive, look for group plans. I found a policy through my college alumni association that was reasonably priced. It was a deal compared to buying individual plans through brokers.

My catastrophic savings plan is multi-tiered. I have a short-term cash account (money-market fund) for monthly bills, a mid-term fund and a long-range plan. The mid-term account I keep in a short-maturity bond fund. It’s designed as a back-up to my short-term kitty.

As I discovered during our health emergency, out-of-pocket costs are usually more than your deductible — expensive drugs were not covered. Then we had ordinary living expenses such as taxes, home repairs (our washer died), dental work and day-to-day bills that had to be paid along with medical bills.

We also had a family stock investment club account — that we invested in over the past decade for fun — although we had to cash that in as well to cover medical bills. This was another welcome back-up, though.

The third leg of our protection plan is long-range savings. We have 401(k)s, 529 college savings plans, Roths and individual retirement accounts (IRAs). We were fortunate that we didn’t have to tap any of these funds, although we didn’t contribute to them, either. They are an absolute last resort for cash since the tax hit on withdrawals would only net around 60 cents on the dollar.

I regard my “ready money” savings strategy as a faithful friend in the way that Ben Franklin saw it. It may not provide as much comfort as a great spouse or partner, wonderful children or a dog (I’m counting these blessings), but it sure can pay some bills and allow one to rebound in the worst of times.

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