Is It Time for a Disability Insurance Checkup?

Is It Time for a Disability Insurance Checkup?

Many people own life insurance but, at our firm, we see fewer people who own disability insurance. Why might one need disability insurance? Often one’s biggest asset is one’s ability to earn an income. Calculate the present value of a future income stream, and the resulting value is usually pretty large. Disability insurance is designed to replace some of this income in the event of a short-term or long-term disability. And, contrary to what one might think, a disability need not be the result of some catastrophic event; one might not be able to work due to a skiing accident, running injury, or some other unexpected event that arises from an activity one enjoys. According to the Council for Disability Awareness, “Musculoskeletal system and connective tissue disorders remain the leading cause of new and ongoing disability claims….” As we all know, however, buying insurance often feels like gambling. What are the odds one might need to file a claim? Listen to some insurance companies and they’ll scare you into buying disability insurance with inaccurate statistics. This helpful article by Ron Lieber over at The New York Times points out some of the fallacious reasoning behind such claims, and it goes on to point out that the odds of a long-term disability that will keep one out of work for more than 90 days are around 30%. These odds, he goes on to explain, could be even lower depending on one’s occupation. If you want to know your odds, here’s a helpful calculator that will take into account your own occupation and circumstances. For short-term disabilities, a good cash reserve can help pay immediate expenses....
Protecting the Ones You Love: Why Insurance Matters

Protecting the Ones You Love: Why Insurance Matters

Lately we’ve encountered some very disheartening anecdotes from several of our clients, and they’re all a reminder of why we daily talk with our clients about risk management. The hope is that we’ll all live long lives free of disability and other unforeseen traumas, but the reality is that this doesn’t always happen. In my own immediate family, for example, I have a close family member who was in a terrible auto accident, had to have an above-the-knee leg amputation, and will never again be able to return to work. This has had a ripple effect on this individual’s spouse, who has since had to retire early from her executive-level career so that she can care for her husband. This chain reaction will continue with the inevitable result that retirement savings will not be as robust as they would have been had this terrible accident never occurred. Another client recently shared the story of a co-worker who died unexpectedly in his 40s, did not own any life insurance, and who subsequently left his wife and two kids in a severe state of financial insecurity. I could talk at length about these and many other stories I’ve encountered over the years, but the moral of the story is that one should have a risk management plan. I.e., one needs to be adequately insured in the event of a disability, emergency, or premature death. While nothing can take away the emotional and psychological pain that comes along with such travesties, the economic burden can be mitigated with some good financial planning. A good place to start is with one’s group benefits. We...
How to Be a Successful Investor: Why It’s More Than Keeping Costs Low

How to Be a Successful Investor: Why It’s More Than Keeping Costs Low

  We regularly come across clients who follow an indexing investment strategy. Indexing is not necessarily a bad thing; we follow what one might call an enhanced indexing strategy for our own portfolios. Indexing is usually an investment strategy that is associated with keeping investment costs low and investing in an entire investment index. With that said, indexing—at least the way we often see it done by clients—is not enough to be a successful investor. While costs and holding a wide array of securities are important to a total investment strategy, there is more to being a successful investor than merely selecting indexes and avoiding expenses. Asset Allocation First and foremost, investors need to keep asset allocation in mind. A failure to properly allocate one’s portfolio is probably the most fundamental flaw we see investors make. We’ve all seen the pie charts that lay out sample asset allocation models (see sample, below). Contrary to what some might think, there’s actually a lot of academic research behind the idea of asset allocation. In fact, the fundamental ideas behind such pie charts resulted in a Nobel Prize being awarded to three economists in 1990, and their ideas still lay the academic bedrock for investment success. In our own practice, we spend a lot of time on our portfolios to ensure that they represent an optimal amount of return for a given level of risk. We also work hard to avoid unnecessary risk, and we pay a lot of attention to a portfolio’s Sharpe Ratio—a measure of risk-adjusted returns created by Nobel Laureate William F. Sharpe. Most portfolios are lacking important slices of the pie, or...

Creating Wealth by Understanding Risk

To avoid common potholes that can lead to financial ruin, it is critical to understand the role that risk plays in one’s personal finances. From my experience as a financial planner, it has become clear that many people have an overly narrow view of risk. When people think of risk, they all-too-often think in terms of how to avoid or minimize something, namely investment losses. Taking a more holistic view, however, I try to help my clients understand that risk is not necessarily something to avoid or minimize. Sometimes I even try and help clients embrace and take on more risk. While it may seem counterintuitive, it is critical to understand that a failure to embrace risk can lead to financial disaster. This is because a myopic view of risk divorces one’s financial goals from one’s total financial picture. In other words, when risk is too narrowly defined, it can result in important financial decisions being made in a vacuum, the end result of which is that one’s financial choices become constrained and goals aren’t accomplished. To put this in practical terms, a failure to understand risk might mean that one doesn’t retire on time, college funding goals might not be met, and quality of living during retirement might deteriorate. Understanding risk is important. One scenario that I regularly encounter is that of the retiree or prospective retiree who, because of a definition of risk that is centered on avoiding losses, invests significant sums of money in low-interest bearing investments such as CDs or other cash equivalents. The thinking behind such a decision is that these investments are “risk free” or “safe”. What this...