It is often more difficult to recover from financial setbacks as one gets older. There is less time available to invest for retirement, recoup money lost in the stock market, or receive "payback" from investments in human capital (e.g., a college degree). Therefore, it is wise to begin financial planning in early adulthood, in case something goes awry and to increase one's financial resilience.
Financial resilience is the ability to withstand life events, both negative (e.g., loss of a job) and positive (e.g., birth of a child), that impact one's income and/or assets. Some financially stressful events, such as increased family size, unemployment, widowhood, disability, and health problems, affect people individually. Others, such as layoffs, plant closings, corporate scandals, recessions, stock market downturns, and acts of terrorism, affect large groups of people or society as a whole. Below is a description of four common later life financial challenges and solutions:
Unemployment--Workers faced with involuntary retirement in later life must take stock of their financial resources, marketable job skills, and emotional readiness for retirement. The federal COBRA law provides an opportunity to continue health insurance for up to 18 months, at group rates plus a 2% administrative fee, until an individual policy (or new group coverage) is obtained or a worker is eligible for Medicare. Those who leave a job at age 63½ can use COBRA benefits to tide them over until they are eligible for Medicare at age 65. However, only workers covered by employers with 20 or more employees are eligible for COBRA benefits and the cost is expensive for those out of work.
Poor or Uncertain Health Prognosis--A life-threatening disease or chronic, debilitating illness prior to or during retirement is a financial wake-up call. Some people accelerate their retirement date to enjoy unstructured time while they can. Others reduce their work hours because they want to or have to (e.g., fatigue). A revised retirement savings analysis that incorporates the health prognosis is in order. Life expectancy estimates and retirement savings plan contributions may need to be adjusted. A poor or uncertain health prognosis may also prompt the drafting of estate-planning documents that, ideally, should be in place regardless of health status. These include a will, living will, and durable power of attorney.
Death of a Spouse--Few events can turn a person's financial life upside down as the death of a spouse. In addition to shock and/or grief and loss of a spouse's companionship, there is often less household income than before. There are also many decisions to be made (e.g., investing life insurance proceeds), forms to be completed, and suggestions from "helpful" family members and/or financial salespeople. Most experts advise surviving spouses to take their time and not make any major financial decisions immediately. Survivors who receive an insurance settlement or other payment can place the funds in a certificate of deposit (CD) or money market mutual fund until they have time to explore longer-term investment alternatives. Another important step is to identify and secure available resources such as life insurance policy proceeds, employee benefits, and veteran's benefits.
Investment Losses--Prolonged market slumps, such 2000-2002, can significantly erode gains made during previous bull markets. Many investment portfolios in early 2003 are a fraction of their former value. The last time that investors experienced three consecutive years of stock market declines was 1939-41. Not surprisingly, many investors have discovered that their risk tolerance isn't as aggressive as they thought it was. Some have sold stock at a loss and fled to cash and bonds paying historically low interest rates. Investment experts preach patience and a long-term perspective. Investors who try to "time the market" often miss the best trading days that inevitably follow days with large losses. Bear markets are particularly traumatic for those approaching or in retirement, who may not have the luxury of time to "ride it out." Limiting withdrawals from investment accounts is often required during market downturns to reduce the risk of outliving one's income.