Disability strikes like lightning: usually unexpected, always unwelcome, and often devastating financially. As you've already discovered, your own chances of becoming disabled are worse than you might think. Could you handle it financially if you or your spouse couldn't work or earn an income? How would you pay your bills?
The fact is, most of us are totally unprepared because we've never stopped and worked things out in advance. Follow these steps and be ready if it happens to you or a member of your family.
- Complete our Income/Expense Review if you have not done so already
Let's begin at the beginning, and determine how much money is coming in and going out each month.
- Reduce your spending
Look at the results of your Income/Expense Review. If your income was reduced or eliminated by a disability, would your expenses exceed your income? If so, look for ways to reduce your discretionary spending, i.e., little luxuries we enjoy but are not strictly necessary. For example:
- Entertainment expenses
- Dining out
- Electronic gadgets
- Cable television
- Flat-panel TV, etc.
- Find Additional Sources of Income
Disability robs you of a vital asset -- your ability to work and earn an income. Without a paycheck, you'll need alternate sources of income that will help support your family's lifestyle and preserve your financial security. Here are a few potential income sources:
- Employer Sick Pay
Many employers provide sick-pay programs for their employees. The costs and eligibility vary from company to company, so ask your human resources department about any payments you might qualify for if you became disabled and couldn't work.
- Disability Benefits
Disability insurance, whether provided by your employer or purchased individually, can be an invaluable source of income for you and your family. If your employer offers disability insurance, make sure you fully understand what benefits are available to you and how the disability program works. If you're self-employed, disability insurance can be an important investment that provides real protection if you are unable to work. Disability insurance can be complex, so consult your financial advisor or a trusted insurance agent for guidance.
- Social Security Disability Insurance (SSDI) and Workers' Compensation
These two programs are the cornerstones of financial security for the majority of disabled American workers.
- Social Security
Many disabled workers qualify for disability benefits through the Social Security Disability Insurance program (SSDI). If someone cannot work because of a disabling medical condition, SSDI generally pays benefits after a six-month waiting period. Your eligibility and benefits are based on the number of years you've been paying into the Social Security program, usually via payroll deduction. Get more information on Social Security benefits.
- Workers' Compensation
This is a state program that pays benefits to employees who are injured at work or suffer a work-related illness. Workers' Compensation benefits help pay for medical care and rehabilitation to speed your return to work. Payments begin after a short waiting period, and usually amount to a percentage of your salary. Benefits vary widely from state to state, and are subject to maximum and minimum amounts. Get more information on workers' compensation. This site links to all 50 states' workers' compensation board Web sites and provides addresses and phone numbers of state agencies.
- Social Security
- Personal Savings
Unfortunately, few of us have enough savings to live comfortably through a prolonged period without income. The savings rate of Americans has been at record lows for decades, and the recent economic turmoil has already devastated the savings of many of us. One-third of all Americans have NO retirement savings or pension, according to the Social Security Administration. A single period of disability, especially one lasting more than 90 days, could potentially be the straw that breaks a family's financial back.
- "Last Resort" Sources of Income
These include asking family or friends for assistance, taking out a second mortgage or tapping your existing home equity line of credit, using credit cards, withdrawing money from your 401(k) and/or IRA retirement plans.
- Employer Sick Pay
- Stay Healthy
A healthy lifestyle is often overlooked as a way of reducing your chance of becoming disabled. A personal wellness program should be a part of everyone's Personal Financial Security Plan. Keeping your body strong is something you can directly influence, and it's an important factor in your well-being and financial security.
- Develop an Action Plan
The Income/Expense Review gave you an estimate of what your net income would be during a period of disability. Now it's time to take action.
- Review your top priorities and timelines, and make a checklist of specific actions you will take.
- Adopt a wellness program, if you don't already have one. Be sure to include daily exercise and healthy eating habits. It does not have to be expensive or complex.
- Update your plan every year as your personal and financial circumstances change.
Today is the perfect day to begin creating a personal financial plan that will help you and your family better prepare for the unthinkable.We hope this tool has been useful in laying a foundation for your financial security if a disability prevents you from earning an income.