The Financial Impact of a Critical Illness on Your Retirement
You’ve done everything right: You started saving early, diversified your investment portfolio, and made a retirement plan. But then, you—or your partner, or a parent—get sick. Suddenly, your financial world is turned upside down.
Whether it be cancer, heart disease, or any number of chronic illnesses, the fact remains: Health care costs are astronomical and not always completely covered even by the best health insurance.
What happens when a critical illness disrupts your carefully built retirement plan? In this post, we’ll go over the potential financial impact and the actions you can take to help prepare in the event of a surprise illness.
When a Critical Illness Hits, You Will Need to Realign Your Goals
Prior to becoming sick, you might have laid out your investment strategy with the assumption that nothing would interrupt the steady growth of your assets until you reached retirement age. Your priorities may have been growing a nest egg for retirement, paying off your mortgage, and building a college fund for your children.
But if that unwanted diagnosis comes, everything changes. Your priorities will immediately shift—whether you want them to or not.
Your priority now is getting better and paying medical expenses for treatment. You might need to put other things on a back burner, like paying off a house or contributing to your retirement account.
You Will Need to Rearrange Your Finances
If your illness forces you to stop working, you’ll need some way to pay for your living expenses or the treatment that isn’t covered by your insurance.
You may be forced to redistribute your financial resources into more easily accessible, short-term liquid assets like certificates of deposit (CDs) or cash. Having most of your money tied up in illiquid investments could mean you won’t have options when you need them, whereas you can pull cash from most mutual funds within one business day.
As grim as this sounds, it can help prompt you to consider the impact on your finances now, while you are healthy, so you can prepare and protect yourself as best you can.
Steps to Take in Advance
Start by saving as much as you can. Consider building an emergency fund with enough money to cover you for six months’ worth of daily expenses.
Even if you have insurance coverage for your medical bills, you may experience delays in payments. Your emergency fund can provide peace of mind during a time you (or your family members) should be focused on getting better.
Next, evaluate your health insurance, and make sure you have a comprehensive policy. Fall is the traditional time that companies offer open enrollment for health insurance and other benefits. Take the time to assess your current policy, any changes (e.g., co-pay or coverage) that the insurer is making, and whether another policy would better support you if you become critically ill.
Sign up for any short-term and long-term disability coverage that your employer provides. You may want to supplement this with increased coverage, knowing that the policy can cover lost wages if you become disabled or suffer a long-term illness.
You may want to supplement your standard health insurance with critical illness insurance (CII). CII works by providing a lump sum payment that helps you manage the costs that aren’t covered by your health insurance, like specialized care, uncovered prescriptions, the purchase of medical equipment, and living costs. CII comes in varying plan types and premium payment options, giving you the ability to pay up the policy before you reach retirement.
However, be aware that the policy may cover only some forms of critical illness. Coverage also may end at a certain age or fail to cover a recurrence of a disease. Make sure to do your research and read all policy stipulations carefully, or work with a fiduciary financial advisor to assess whether a policy is right in light of your financial situation and long-term goals.
Finally, have advance directives drawn up so that doctors know what kind of life-saving treatment you would want. You can also work with your attorney to set powers of attorney for health care and finances. Designate someone you trust to make medical or financial decisions on your behalf should you become incapacitated and unable to make them yourself.
Don’t Let a Critical Illness Derail Your Retirement
While no one wants to think about falling prey to an unexpected condition such as a heart attack, it’s better to contemplate all the ways a surprise setback can affect your retirement assets. It’s one of the planning points our Greenwood Village, CO retirement planning firm emphasizes with our clients.
Make sure you are as prepared as possible by making a plan for your emergency fund, health insurance, and any supplemental insurance policies. If you are unsure how this should look in light of your financial situation, consider talking with a fee-only financial advisor.
Discuss your situation with a fee-only financial advisor. Schedule a complimentary discovery call.
This material was prepared by Kaleido Inc. from information derived from sources believed to be accurate. This information should not be construed as investment, tax or legal advice.
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