Creating a Retirement Safety Net for More Financial Security. By: Brad Furges

Have you built a “safety net” around your portfolio so that you can better ensure your current and future financial security?

If not, this should likely be on your To-Do list – particularly if you are getting closer to retirement. Otherwise, even a slight market “correction” could end up reducing your funds, and your lifestyle, in the future.


What is a Financial Safety Net and Why Do You Need One?

Most anything of value should be protected. This includes the funds that you have built up over time for retirement. In fact, the closer you are to your ideal retirement date, the more important it is to make sure that nothing can reduce or eliminate your savings because it could have a significant impact on your future lifestyle. 

A financial safety net has the goal of protecting you and your loved ones – at least in part – from losing financial security and/or derailing your long-term financial goals due to an unexpected event such as a(n):

  • Stock market/investment loss
  • Catastrophic illness or injury
  • Need for long-term care services 
  • Personal tragedy 
  • Costly emergency 


What are the Key Elements of a Strong Retirement Safety Net?

There can be several key components that are needed for building a strong financial safety net. These should ideally include the following items:

  • Building an emergency fund
  • Protecting loved ones 
  • Keeping income safe
  • Preparing for retirement
  • Insuring against large financial losses 


Building an Emergency Fund

One of the most important elements of a financial and retirement safety net is to build an emergency fund that may be used for paying the cost of uninsured medical needs, costly car or home repairs, and/or income in the event of a job loss.

Many financial advisors recommend that you have at least six to twelve months of living expenses in your emergency fund. In addition, these funds should be placed in low-risk, highly-liquid financial vehicles like a bank savings or money market account. 

Using the money in your emergency fund for unexpected financial-related events can prevent you from having to dip into your retirement funds and/or put these expenses on a high-interest credit card.  


Protecting Loved Ones

Another primary component of your financial safety net is to protect your loved ones from financial hardship. For instance, if a family income-earner suddenly dies or becomes disabled, his or her income will disappear – but funds are still needed for paying housing costs, as well as for utilities, transportation, food, and other needs. 

Life insurance coverage can help. If the insured passes away, the proceeds from a life insurance policy are received income tax-free to the beneficiary(ies). This money may be used for paying off debts, replacing income, and various other needs of the survivors. 


Keeping Income Safe

Becoming ill or injured is much more common than most people believe – even if you are currently young and in good health. According to statistics from the Council for Disability Awareness, more than one in four 20-year-olds can expect to be out of work for at least a year before reaching retirement age due to a disabling condition.

What would happen to your income and lifestyle if you were suddenly unable to work?

Nearly half of American adults would be unable to pay an unexpected bill for $400 or more without having to take out a loan or sell something to generate the money. Some of the most common reasons for long-term disability claims include:

  • Musculoskeletal disorders
  • Cancer
  • Pregnancy
  • Mental health issues (such as depression or anxiety)
  • Injuries like sprains, fractures, and strains of ligaments and muscles 

Unfortunately, many people assume that they will be automatically covered by Social Security or workers’ compensation if they are unable to work and earn an income. But this is not necessarily the case. 

This program has a strict set of requirements for benefit qualification that includes being unable to perform any job, based on your education and skills – regardless of whether or not it is in your current industry. 

To determine whether or not you would qualify for Social Security disability benefits, you can visit the website for the Social Security Administration at:

Disability insurance could be a viable solution. A disability insurance policy can pay a regular income stream to an insured who is unable to work due to a qualifying illness or injury. This incoming cash flow can help with the continued payment of bills in the household. This type of coverage may be offered through an employer’s benefit package and/or bought directly by the insured individual. 


Preparing for Retirement 

A financial safety net should also include a good solid retirement plan that ideally includes a method of generating one or more streams of ongoing, lifetime income that will continue to flow in regardless of what happens in the stock market, or even in the economy overall. 

If you qualify for Social Security retirement benefits, this could provide you with at least some of the income you will need. However, based on information from the Social Security Administration, an average wage earner will only replace about 40% of his or her pre-retirement earnings from these benefits.

So, where will the rest come from? 

One option is through an annuity. These financial vehicles are designed to pay out income for either a set period of time – such as ten or twenty years – or even for the remainder of your lifetime, no matter how long that may be. 

Annuities can also provide you with other benefits, too, depending on the type you own. For instance, the funds that are inside of an annuity are allowed to grow on a tax-deferred basis. An annuity could also include a death benefit, as well as waivers for accessing funds in the event of an illness and/or the need for long-term care. 

All annuities are not exactly the same, though. So, it is essential that you have a good understanding of how annuities work before you make a long-term commitment to purchasing one.  

As we age, we also tend to require more healthcare and long-term care services. These can be expensive – even with health insurance or Medicare coverage. Based on a survey from Fidelity Investments, an average 65-year-old couple who retired in 2020 will require approximately $295,000 in out-of-pocket healthcare costs throughout their remaining lifetime. 

This figure does not include the cost of a long-term care need, though – and this could add a significant amount of expense…one that could quickly deplete even a nice sized retirement portfolio.

In 2020, the average monthly expense of a private room at a skilled nursing facility was over $8,800. This equates to more than $105,000 per year. Receiving care at home could cost less, but this really is dependent on the type and the duration of the services received. 


Monthly Median Cost of Long-Term Care Services (in 2020)

Homemaker Services – $4,481

Adult Day Health Care – $1,603

Nursing Home Facility – Semi-Private Room – $7,756

Home Health Aide – $4,576

Assisted Living Facility – $4,300

Nursing Home Facility – Private Room – $8,821

Source: Genworth Cost of Care Survey 2020


Medicare pays very little for long-term care needs. This program also has strict criteria regarding how to qualify for the benefits. Therefore, many people must find other ways to pay these expenses. 

One option is to purchase a long-term care insurance policy. Alternatively, a combination life insurance/long-term care plan or annuity/long-term care plan could provide the necessary safety net for the cost of care. But, if care is never required, the policy would still pay benefits for other needs. 


Insuring Against Large Financial Losses

Because accidents can and do occur, another key part of your financial safety net should include insuring against potentially large financial losses. Just some of the coverage that can help to prevent losses to your savings, investments, and/or other assets include:

  • Homeowners insurance
  • Auto coverage
  • Liability insurance
  • Business insurance (if you are the owner or partner in a company)
  • Identity theft protection 


Are You Ready to Build a Safety Net for Your Financial Security?

Given all of the potential threats to your savings and retirement assets, it is imperative to have some protection in place. Not all asset safety measures will be right for all investors and retirees across the board. Therefore, it is best to discuss your specific needs with a retirement income specialist. That way, the plan that you ultimately choose can be more custom-designed for your objectives.


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