There are three financial risks to have a plan for.
1) If you live too long (investments)
2) If you live too short (life insurance)
3) If you get sick (disability insurance & liquidity)
3. Disability: Average length of disability is over 34.6 months! Your expenses continue, but your income stops. What is your plan if you can’t work for 3 years? If you are working because you need your paycheque then you should have disability insurance.
2. Premature Death: Financially speaking, your value is your earning power. What would happen to those people depending on you if you died tomorrow? Just burying you and paying off debts is generally not enough. What happens to your group insurance if you change jobs. You have to have a safe plan to replace your earning capacity. For example, you need $1,000,000 generating 6% to earn $60,000/ year.
1. We will live longer than we want: It is likely that one person from a 60 year old couple will live to age 94. A dollar today will have the purchasing power of about 23.8 cents in 34 years. Health care spending is the greatest in people’s final years. Your spending in retirement won’t go down, but it will change over time.
You are a long term investor and need more money than you expect. You have to balance the risks of losing capital with the risks of losing purchasing power. You have to protect from loss of both capital and spending power. A “safe” investment may not be so safe.
