SOURCE: BMO Private Bank

May 21, 2013 13:00 ET

BMO Wealth Institute Report: Americans Putting Themselves at Financial Risk by Not Planning for Unexpected Life Events

CHICAGO, IL--(Marketwired - May 21, 2013) -

  • Three-quarters of Americans worry about having enough money to retire
  • Disability, death and divorce can seriously derail retirement plans
  • Loss of income and unplanned spending will affect long-term savings
  • BMO Wealth Institute offers strategies to help Americans make better financial decisions and achieve peace of mind

Americans are continuing to voice concerns about their retirement and rising health care costs, yet many have not considered financial contingency plans in case an unexpected life event occurs, a BMO Wealth Institute Report released today reveals.

The report, Life events that may derail a financial plan, found that close to three-quarters of Americans are concerned about having enough money to retire and about being able to afford unexpected health care costs, yet only 36 per cent have a financial plan. And while having a financial plan is important, it is not an end in itself. According to the report, a solid financial plan must take into account unexpected life events that can affect a person's financial future.

"The most significant derailments to a financial plan are the death or disability of a spouse, partner or family member, as well as separation or divorce, particularly later in life," said Stephen Williams, Vice President, U.S. Financial Planning Strategy, BMO Private Bank. "Taking a practical and proactive approach to these potential risks allows families to implement changes to their financial plan that will put them in a more secure financial position going forward and provide greater peace of mind."

Loss of Income and Withdrawal from Savings Pose Double Threat

The report reveals that Americans encounter a double threat when faced with these dramatic life events:

  • Loss of income can lead to additional unplanned spending that might negatively impact savings.
  • Premature withdrawal from savings that were set aside for future goals such as retirement.

Williams noted that one of the biggest mistakes individuals make is having a plan that meets their goals but not stress-testing it against the major life events that could occur.

"By planning for the long term, and trying to bill in contingencies to 'plan for the unexpected', it's possible to reduce the financial stress that a life-changing event can have on you and your family," he said.

While the financial impact caused by derailments can be significant, the report outlines several strategies that families can use to plan for and insulate themselves from the worst of the financial impact.

Disability or Illness: The report noted that loss of income, drawing down on savings, and medical costs over and above what is covered by the family's medical coverage can quickly add up and become a burden on a spouse or family. The impact can be even more devastating if a person is single and has no one else to rely on for financial help. Government support is often limited and comes with specific qualifying conditions. The BMO Wealth Institute advises Americans to:

  • Set up an emergency fund to cover costs during a short-term disability, and hold them in safe alternatives like FDIC covered accounts.
  • Consolidate funds held in smaller accounts across multiple financial institutions to simplify building and managing their funds.
  • As a last resort, consider pulling funds from a Roth IRA as contributed amounts can be taken out tax-free without penalties even before age 59 if you are disabled (subject to tax rules).
  • Consider disability insurance, income replacement insurance, long-term care insurance, and critical illness insurance to reduce the impact on a financial plan.

Death: The premature death of a spouse or partner can have a catastrophic financial impact. For a couple without life insurance, a spouse's premature passing could mean that income stops but bills and expenses continue to arrive. To prepare:

  • Review beneficiary designations, wills and power of attorneys, and re-examine the financial plan.
  • Buy term insurance to cover risks with a time period (such as remaining mortgage, education fund for children, or income replacement).
  • Consider permanent insurance to cover longer-term needs and build up savings on a tax-deferred basis.

Separation or Divorce: Close to half of marriages in America end in divorce. The financial implications cannot be ignored. In most cases, each of the ex-spouses and the children will have a lower standard of living than they previously enjoyed. To prepare:

  • Review and update the financial plan.
  • Update beneficiary designations on life insurance policies, employee group insurance, pensions, Individual Retirement Accounts (IRAs), and 401(k)s.
  • Seek legal advice on will and power of attorney and adjust as necessary.
  • Determine if new or additional insurance coverage is necessary.
  • Update credit and eliminate joint responsibilities or guarantees.

"Nobody wants to think about unpleasant events, but life happens and it is incumbent upon all of us to prepare accordingly," said Williams. "Proactive planning and professional advice go hand in hand, so align yourself with a financial professional who can help you understand the impact of derailments on your financial plan.

The BMO Wealth Institute provides insights and strategies around wealth planning and financial decisions. The Institute's team of wealth planning professionals has deep expertise around all aspects of wealth planning including retirement, estate, tax and insurance.

To view a copy of the full report, please visit:

BMO Private Bank is a brand name used in the United States by BMO Harris Bank N.A. Member FDIC. Not all products and services are available in every state and/or location. Estate planning requires legal assistance which BMO Harris Bank N.A. and its affiliates do not provide. Please consult with your legal advisor. 

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