Top Financial Risks: Everything You Never Wanted To Know About What Could Go Wrong

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Since I have had many personal experiences that could be described as “train wrecks,” I have a natural propensity to look for the other shoe to drop when it comes to my clients’ situations. While it may sound pessimistic, I see this as the most important step in the financial planning process.

Identifying and managing risk issues are not skills taught in major wealth management firms. For their own risk management reasons, they don’t want to go on record with advice that would make them legally responsible for mitigating those risks. For this reason, I rarely see the type of risk management issues addressed that I believe are important.

Even if you hired a talented money manager who doubled your money in a short period of time, it wouldn’t make any difference if something happened that took it all away. Without proper risk management, successful investments only give you more to lose.

Because of how much I focus on the area of risk management, I have received my highest compliments and thanks from clients who have benefited from my being proactive. After all, life happens to all of us.

My Top 23 Risk List

The following list represents the 23 most common risks I see with my clients. This is by no means an exhaustive compilation, but these are some of the primary issues I encounter regularly. Each of these can wreak havoc on a family’s finances if not addressed. Working with your team of financial advisors, you should aim to put a “completed” checkmark next to each of the categories below.

  1. Health insurance: Be sure you and all family members are covered, and consider risks such as losing employer-sponsored coverage. You should also consider additional coverage to supplement your Medicare.
  2. Pension: If you have a pension and you depend on it for all or part of your needs, be sure it is well funded. If you don’t believe me, just ask anyone who had to scale back their retirement dreams after pension benefits were slashed when their company filed for bankruptcy.
  3. Social Security benefits: Deciding when to take Social Security will depend on each client’s circumstances and life expectancy. If you have a family history of good health, it might make sense to wait to get the maximum benefit. If you have a family history of poor health or have a physical ailment, it might make sense to take your benefits early.
  4. High concentration of publicly traded stock: Enron employees watched their retirement plans soar as the value of their Enron stock rose. Unfortunately, many also lost it all when the company filed for bankruptcy. Risk management strategies exist to protect against the dangers of concentrated stock portfolios.
  5. Homeowner’s insurance: Make sure to have your policy evaluated by a third party to avoid surprises. For example, the policy might say it is for full replacement coverage, but only if you rebuild on the same slab.
  6. Umbrella liability insurance: This is important for covering homes and automobiles.
  7. College education expenses: You may want to consider this not only for your children but also for grandchildren, etc. This generally means establishing a 529 plan, ESA, or other college tuition plan.
  8. Teenage drivers: Teenagers can be a considerable risk to their parents. Buy them their own insurance policy, and title the car they drive in their own name. You might also set up a “no questions asked” taxi fund to avoid the risk of drunk driving.
  9. Early demise: Life insurance is needed to offset the loss of the breadwinner’s income. For those who have young children, it is an absolute necessity. To determine how much life insurance is needed, ask yourself, “How much income am I trying to replace?” Many people purchase life insurance policies for their children and their children’s spouses. This assures that their grandchildren will have sufficient resources in case of an adult child’s early demise.
  10. Long-term illness: Long-term care insurance is essential to explore for anyone over the age of 50. For those who don’t think they can afford it, imagine the cost of not having it should you become disabled and actually need it. Failure to have a policy could destroy the nest egg of even moderately wealthy Americans.
  11. Rental real estate: There is always the significant risk of tenants or their guests getting hurt on your property and filing a lawsuit. You should consider owning all investment real estate in the name of an entity and outside of your own name (an attorney can help you set this up). An umbrella liability insurance policy is also an important tool to mitigate this risk.
  12. Owning “toys”: Toys such as planes, boats, RVs, jet skis, and four-wheelers create an enormous potential liability, particularly if you are wealthy or have a high profile. As in the case of rental property, using an entity to hold the asset can be a good idea. Also, you need to have proper liability insurance.
  13. Closely held business: The biggest risk here is illiquidity. You need a strategy for deriving income from the business. Also, you need a succession plan that sets forth terms in the case of death, disability, divorce, or retirement of partners or shareholders.
  14. Disability insurance: Business owners are more at risk for this. Most employees have some form of disability insurance through their employer, but business owners rarely have any (or enough) disability insurance for themselves. This is a risk not only for the business owner but also for every employee of that business.
  15. Illiquid assets: This is the risk associated with having a large percentage of net worth in illiquid assets not producing income. You need to have a plan to derive income from these assets if necessary.
  16. Families affected by divorce: Remarriage brings new challenges in planning. For example, a remarried man might want to provide for the income needs of his current spouse in the event of his death, but he might want the bulk of his assets to pass on to the children from his first marriage. Or a woman who receives an inheritance from her parents might want to pass it on to her children, not her current spouse.

Without careful planning, you could accidentally end up disinheriting your children or leaving your assets to someone you never intended to.

  1. “Yours, mine, and ours” family: Imagine the complexity in a situation where each spouse had children prior to the marriage and the couple then has a child or children together. Estate planning could be challenging for this family.
  2. No wills or trusts: An entire book could be written on the problems I have seen in estate planning. By not having a will, you die intestate, and the courts must decide who gets your money. In some states, it is not automatically assumed that the surviving parent is granted guardianship of the minor children. At a minimum, you should have a will to communicate your wishes as to the guardianship for any minor children.
  3. Improper estate plans that are outdated: This can cause unintended consequences, such as the following:
  • Assets being left “outright” or in some graduated format to the children after the death of the second parent can result in the possibility of inheritances being attacked at some later date due to divorce, liability suits, bankruptcies, or creditor issues of the beneficiaries.
  • Under ideal circumstances, amounts left to a spouse may include creditor protection, but that has to be built into the plan.
  • Assets left to a spouse who remarries are sometimes unwittingly left to that spouse’s second spouse, in which case the deceased person unintentionally disinherits his or her own children. Sadly, I have seen this happen before.
  1. Estate tax liability: This can be a huge issue, especially for very wealthy individuals with many nonliquid assets. Upon the death of a couple or individual, the heirs are left with a huge tax bill and insufficient liquidity in the estate to pay it.
  2. Ancillary legal documents not updated: When it comes to such things as health care directives, living wills, and powers of attorney, chances are the laws in your state may have changed and your documents may not be valid. I recommend updating these at least annually.
  3. IRAs not listing a contingent co-income beneficiary: One of the biggest risks of outliving your money is not having enough guaranteed lifetime income. Properly designating a spouse as a contingent co-income beneficiary mitigates or eliminates this risk.
  4. Estate plan not optimized: In a situation where adequate estate planning has not been done, the lion’s share of the estate could end up going to the IRS rather than to children, family, or charities.

I see these risks day in and day out, and most of them have solutions. Of course, there are many risks that can’t be anticipated—our personal Black Swans, if you will—and there’s nothing we can do about them. We cannot anticipate terrorist attacks, wars, or many matters concerning health. While we can eat well and exercise often, it doesn’t always prevent serious health issues from invading our world. The only thing we can do is to be mindful of having good health insurance and sufficient long-term care insurance, so we don’t exhaust the family resources.

If you cannot adequately determine whether all of these risks have been addressed in your planning, I implore you to have a qualified financial advisor take you through a risk assessment of your own to see which, if any, of these possibilities may pertain to your situation.