Planning for the Unexpected

Asking employees to plan for the unexpected might sound like asking them to invest using a crystal ball. Why should employees set aside money for events that may never happen? Experts note that these unexpected events can have the biggest impact on an employee’s financial future. How can a plan sponsor encourage employees to prepare for the unexpected? A good first step may be for plan sponsors to educate employees about likely unexpected events.
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The Known Unknowns:

The most common unexpected costs involve house repairs. While many may plan to replace the roof, its unlikely that they will plan for damage done by squirrels or mice, or have knowledge of a neighbor’s poor maintenance of trees. Other costs many overlook include medical expenses. While many expect health insurance to cover all costs, copays for specialists or costs of things not covered by insurance, such as x-rays or medical devices (even something simple like a split or a sling) can add up.  Employees may also have cut themselves short on dental insurance coverage. The average root canal could cost an employee thousands of dollars if their dental insurance doesn’t cover it.  Other sudden unexpected costs include pet emergencies where emergency vet bills can quickly add up (often the cost of pet car exceeds hundreds of dollars a day).  Finally, the worst unexpected cost may be the loss of a home computer – while theft may be covered by insurance, a quick bumble while moving a laptop could set you back thousands in replacement costs, including employee’s whose spouses rely on home computers for their work or their side jobs.
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Emergency Funds:

At the end of the day, the best way to prepare for the unexpected may be the standard emergency fund. While most employees have heard this advice repeatedly over their financial lives, understanding the specifics of how far that emergency fund would go may help make the need for one easier to understand. For example, most employees know they need 3 to 6 months of living expenses in a savings (or other liquid account), they may relate that need only to a sudden unexpected unemployment. But major medical costs (such as having medical insurance deductibles or copays for specialists) can quickly add up to a month or two’s worth of living expenses, if not more.  And an unexpected illness or injury could cause an employee to lose full time wages for a significant period of time.  While many may think that workers’ compensation benefits will cover lost time, those benefits are not available immediately, and could require waiting as much as six months to a year.  
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Additionally, the amount needed in the emergency fund will differ based on family make up. For single income families, an emergency fund that would last for more than a year is crucial.  Financial experts suggest that these emergency funds be liquid – something that an employee can easily access – but also that they have as high a return on them as possible. Employees may benefit from understanding the difference between savings and money market accounts and other options like certificates of deposit.
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Lastly, while employees know that using credit cards for emergencies is a road to financial heartbreak, it can be helpful to remind employees to leave room on their cards. Having available credit can help in situations where health insurance reimbursements linger, or where home owners’ insurance payments could take more than a few weeks to process. Similarly, employees may benefit from education about when borrowing from a retirement fund is a viable option to cover emergencies and when it is ill-advised.
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Insurance:

If an emergency fund seems out of the question for employees now, another option may be short-term disability insurance. Short term disability insurance generally does not cover all of an employee’s wages, but typically will cover 60% for several months. For employees that don’t have the option through their employer – or for employee’s whose spouses are self-employed, many insurance companies will provide short-term disability to individuals.
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Additionally, financial analysts all agree on one point: if you have children, you need life insurance. While some may disagree about the amount of life insurance needed, most suggest that the amount should cover any debts you owe, and sum to roughly your income per year while your children grow, plus the cost of their education.  
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With the weather becoming increasingly violent, having appropriate insurance to cover natural disasters is also crucial. While many states require flood insurance, having employees understand their renter’s or home owner’s insurance to ensure that tornado, hurricane or flooding is covered can help should they have a close encounter with mother nature.
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If you have a pet, consider pet insurance.  Even the most eagle-eyed owner cannot keep Fido from eating the Christmas ornaments, and a potential trip to the emergency vet in such a situation can cost upwards of $1000. Pet insurance will usually reduce veterinary costs to 20 to 40% of the total, and often reimburse insureds within weeks. This is true also for employees with aging pets. Most pet insurance companies will begin coverage at any stage of a pet’s life.
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Lather, Rinse, Repeat.

Most employees who do live through an unplanned financial event will need to readjust their emergency planning. One unexpected event – such as a hurricane – may cause housing instability for an employee, but could also cause a downturn in the local economy over time, which could cause a spouse to lose employment or have a parent or child who needs financial assistance.  Some financial experts suggest having a backup budget. Backup budgets strip living expenses down to the bare minimum. Things to consider in backup budgets may include knowing which monthly fees can be cancelled without large fees. For example, cutting off cable may trigger a larger fee than would be saved by cutting it back. So too with gym memberships. Backup budgets also usually strip all savings and investing, so having information on how your retirement benefits plan allows employees to halt contributions, and under what circumstances, ready when a disaster is near can be helpful.
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Plan Sponsors should encouraging employees to see training and furthering their career knowledge as part of preparedness. By keeping up to date (or even ahead) of the industry, employees can ensure that they stay valuable to your company, or can transition well should they need to change jobs.