How to Financially Prepare for Extended Labor Leave
How can you prepare your spouse to be fired from work due to a disability? This is what we are discussing this week.
Every Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week Katherine asks a question:
My husband has a long-term chronic illness. He has also been a small business owner for many years. We expect that in 10-15 years he will have long periods of disability to cope with his chronic illness, as a result of which he will not be able to receive income for a certain period of time (probably six months to a year). He’s sort of a consultant, so if he can’t work, his business stops until he can.
We tried to get him long-term disability insurance, and, unsurprisingly, we were turned down. How can we prepare his business and our finances for this anticipated shock? What vehicle is the best to save money on for this?
This is what individual experts usually say about a problem that affects each person differently: if you need personalized advice, you should see a financial planner.
Start saving
I’m sorry to hear about your husband’s health problems, Catherine. Chances are you won’t be able to plan everything that’s going to happen – no one can – but the first step, as you’ve already figured out, is to make a plan and address emotional as well as financial concerns. How old are you and your husband? Has your home paid off? If not, can you pay the rent or mortgage on your own income only? Do you have children? How expensive will his medical attention be? Once you start answering these questions, you will have a better understanding of what to do with your money. (For example, if it’s on your insurance and you have the option of contributing to a health savings account, you can take advantage of this open enrollment because you know you’ll need to spend money soon.)
Regardless of the answers to these questions, you will want to start aggressively building up your cash reserves to last six months or a year, since you indicated that this is how long your husband may be out of work.
“In the short term, the best option is undoubtedly a money market account,” says Thomas Scanlon, a Connecticut- based certified financial planner . Money market accounts (not funds) are essentially savings accounts with higher interest rates. Currently, you can find a decent account with a 2% annual interest rate. It is not much, but there is practically no risk, and they are liquid, which are the most important factors during such a long vacation.
“After a certain amount of assets is saved, say four months, the second vehicle will be the short-term CD,” says Scanlon. CD rates have been low since the Great Recession, but are starting to recover (in fact, the Fed is meeting again this week and experts are expecting new interest rate hikes ). “A CD should have a maximum shelf life of three to six months,” he says.
“The idea is affordability and security,” says David Haas, CFP based in New Jersey. “But also, this couple should save a little more for retirement to offset the likelihood that they will have to stop saving prematurely.”
In this case, the Roth IRA is a good tool to use now: you can spend $ 5,500 ($ 6,500 if you are over 50) on retirement, but you can withdraw your contributions at any time if you and your husband need them. It’s a way to make money in retirement, but still retain some flexibility and security. In some cases, you can withdraw money from other retirement plans early without penalties if you are permanently disabled, although this should be a last resort.
Scanlon says that after opening a money market account and CDs, you may want to consider getting a Home Equity Line of Credit (HELOC) while your husband is working and having income. This will be a “contingency plan in case the period of disability lasts longer than anticipated and the cash reserve is depleted.”
If and when your husband loses his job due to a disability, you should inquire about the tax implications .
Make a succession plan
Then you and your husband should think about what will happen to his business. “Who will take on him if he cannot work? He may enjoy working alone, but it may make sense to hire a partner, ”Haas says, or he may find a full-time job to qualify for group insurance.
Monica Dwyer, a CFP based in Ohio, says another option, depending on the nature of your husband’s work, is to train young counselors to take on the lion’s share of responsibilities when your husband is unable to work. “Basically, he could build a team of people and he could be the sales person who ran the business,” says Dwyer. “He could take himself a percentage of the royalties. Then, if he was sick, there would be people who would help him if he could not work. “
If none of this appeals to you, you may have to make difficult choices and lifestyle changes. “Reduce the size of the house, maybe everything should be on the same level, stop spending two incomes and drop to one,” while he is still healthy, Dwyer suggests. “Take all the money out of his income until you need it later. So when it does, it won’t be a big shock to the system. ”
Finally, if your husband pays into Social Security, he should be eligible for disability benefits. “If not, start paying now,” says Dwyer. And depending on your husband’s business, he may be eligible for guaranteed group disability insurance, according to Haas, at a special group rate. “It may be available through the industry association, and there may be open registration periods.” You can contact a professional organization to find out what options are available for him. Whatever you do, it might make sense to go to a financial professional who specializes in disability insurance. The rules are complex and specific, and right now it’s worth spending some money on expertise to get the best results and prepare for the future.
Good luck in everything.