A breadwinner is accustomed to a regular paycheck, bread coming in like clockwork each pay period. What happens if the paychecks stop? Are you, or your family, toast?

A breadwinner is accustomed to a regular paycheck, bread coming in like clockwork each pay period. What happens if the paychecks stop? Are you, or your family, toast?

Entrepreneurs building an enterprise may be the last to get paid and they have a different mindset and risk profile compared to those depending on the security of a regular check. But lifetime employment with a gold watch and pension largely is gone. A key “what if?” question deals with the sustainability of life as you know it when paychecks stop.

Individuals and families are urged to build a Freedom Fund, at least one year’s worth of living expenses in liquid, accessible money. A good chunk of that should be in insured savings. That provides freedom from worry in case of a short-term reverse or a job change.

You insure your car, home, and possessions against loss. How about your income? Group disability insurance may be a partial answer. However, all group plans have upper limits and exclusions. Disability income normally is taxable as ordinary income. Bonuses generally are excluded from benefit formulas. Many group long-term disability plans offset benefits against Social Security disability payments. For higher paid employees, group plans may result in 40% to 60% pay cuts.

Would you insure your house for only 40% to 60% of value? To fully understand the risk you are taking your advisor should review your company benefit package to quantify gaps in coverage. A personally-owned disability protection plan is portable when you change jobs. If you pay the premium with after-tax dollars as you will, benefits are not taxable. Disability plans are not cheap, reflecting the risk assumed by the insurance company.

If you self-insure, risk still is there. According to BenfitsPro.com (May 2015), just over one in four of today’s 20 year olds will become disabled before they retire. We know about accidents and the GenX and GenY generations are active and adventurous. But calamities are not major culprits. The majority of long-term absences stem from back problems, cancer, heart disease, and other illnesses. The average long term disability claim is almost 35 months in duration. If you or your family depends on $5,000 to $8,000 per month in take home pay, do you have $175,000 to $280,000 in emergency savings outside of your 401(k) or IRA?

We know of a number of situations where talented professionals were sidelined permanently in their 40s due to illness or injuries that made work impossible. How can you build a retirement fund if you cannot earn a living and accumulate one?

We see situations where one parent or a spouse has to quit working or reduce hours to care for a special needs child or an impaired adult such as an aging parent or other loved one.

Strategies involve debt control, regular savings and investment plans to build assets, and insurance where applicable. Get with your advisor to do an insurance audit, looking at the whole picture—life, health, property and casualty, disability, and liability coverage. Recently a couple heading into retirement was found to have only $100,000 per person and $300,000 per incident in liability coverage on their auto policies. One bad accident and a sizeable lawsuit would wipe out much of their financial assets and along with it, retirement security. You see ambulance-chasing lawyers constantly advertising on television. “One call, that’s all,” proclaims one Atlanta lawyer. You don’t want to be on the receiving end of one of his calls, and “that’s all!”

When you retire, your paycheck stops. Crossing that Rubicon may be unnerving. The most disastrous path to retirement security may be the Scarlett O’Hara approach: “I can’t think about that right now.... I’ll think about that tomorrow.” Financial independence may be gone with the wind!

Using the often quoted 4% rule which says that you don’t want to take more than 4% plus inflation out of your retirement nest egg, or you risk running out of money, it takes $1,000,000 to produce $40,000 per year in cash flow, $3,333 per month. Start saving. Now. The sooner the better!

Lewis Walker is President of Walker Capital Management, LLC. Certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative of SFA which is otherwise unaffiliated with Walker Capital Management, LLC. lewisw@theinvestmentcoach.com

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