“That could never happen to me.”

Those are some of the most dangerous words in financial planning.  Each of us faces a myriad of risks that could derail our retirement, lower our standard of living, and hinder us from reaching our goals. One way to protect ourselves and our families is learning about these possible financial pitfalls and planning ahead. Here are 9 unexpected ways that you may be exposed to risk. For more information or to review your financial situation, contact our office today.

#1. Your insurance policy doesn’t cover what you think it does.

Insurance comes with a long, detailed list of what is and isn’t covered, all in confusing legalese and industry jargon. As a result, consumers are often not fully aware of what their policies cover. Most homeowner’s policies, for example, do not cover sewage backup or mold damage. Also, limited or no protection is given to business property stored in your home, risk for telecommuters. Coverage for these commonly excluded items can be purchased separately through riders at additional cost.

#2. Your umbrella has gaps.

First, make sure you have umbrella coverage, and that your coverage limit is high enough. If you purchased your policy years ago, your net worth may have risen above your limit, potentially exposing personal assets to liability from an auto accident, injury on your property, or other perils. Even if you have an umbrella policy, it may have unexpected coverage gaps. Many umbrella policies require a certain dollar limit in your underlying homeowners or auto coverage. If your underlying coverage is too low, a large claim may leave you on the hook for hundreds of thousands of dollars to make up the difference.

#3. You aren’t protected against disability.

Many breadwinners are aware of the need for life insurance, especially with young children or other dependents. Should the primary earner die young, the family may be left struggling to make ends meet. As a result, many workers purchase life insurance to protect against this loss. However, many fail to plan for a disability. It is more likely; while over 25% of 20 year olds will become disabled before retirement age,[1] less than 7% will die prematurely.[2] A disability also often comes with additional costs. Not only is there lost income, but there are health care and rehabilitation expenses. These costs range from an extra $1,170 to $6,952 per year.[3]

#4. You have too much in one company.

This is concentrated stock risk, the danger that too high a percentage of your portfolio is in one stock. Swings in the stock can adversely impact your portfolio, so that a dip in the price may bring your entire portfolio down with it. This is especially risky for those with a significant amount of employer stock, often through stock options or an ESPP. A downturn for your employer can serve the double damage of sinking your investment portfolio at the same time your employment is uncertain.

#5. Your estate isn’t left to those you want.

Many individuals have not yet completed an estate plan, including a will, trust, or power of attorney. In such situations, their estate will pass through probate, an often lengthy and expensive process where the state divides up your assets, which may or may not follow your wishes. Even with an estate plan, be aware that retirement accounts, insurance policies, and other assets with a designated beneficiary won’t pass according to your will or trust. An old 401(k) or life insurance policy may name a former spouse, deceased friend, or charity you no longer wish to support.

#6. You may outlive your money.

Thanks to the modern medicine, we’re all living longer. The US life expectancy was 55.1 in 1915, 70.2 in 1965, and 79.2 in 2015.[4] At the same time, fewer employers are providing pensions or other income guaranteed to last during a retirees’ lifetime. Americans are not only living longer, but are incurring higher costs for health and aging living care. Last year, the AARP reported that 52% of individuals 65 and older will need long-term care services, with an average duration of two years.[5] In California, yearly long-term care costs average $57,200 for home health services, $51,300 for assisted living facilities, and $116,435 for a private room in a nursing home. These costs are also on the rise; over the last 5 years, costs in each category have risen 2-4% per year,[6] almost twice the average US inflation rate of 1.3%.[7] As a result, many Americans face a funding gap, with insufficient assets to last through retirement.

#7. Your personal assets may be within reach of business creditors.

Business owners, beware. Corporate structures that don’t limit the owner’s liability (such as a sole proprietorship or partnership) can expose personal assets to loss. Another common mistake is using the same entity for business operations and owning assets, or holding separate lines of business under the same entity. Either way, liability in one area of the business can “bleed” into other areas.

#8. You may take care of family members longer than you realize.

Unexpected care for children, parents, and other loved ones drains a family emotionally, physically, and financially. 15% of middle-age American adults are in the so-called “sandwich generation,” supporting both an aging parent and a child. On average, these families spend $10,000/year on care.[8] This is a significant burden and may require one spouse to reduce hours or retire early, further straining their finances.

#9. Your identity is at risk.

Today’s cyber criminals are more sophisticated than ever. Gone are the days of obvious tactics, such as an email from an “African prince” leaving you his legacy or the long-lost cousin stranded in the Philippines. Identity thieves are instead drawing from a pool of online sources, such as social media (Facebook, Instagram, Twitter), newspaper articles, or data aggregators, to create a targeted and personalized attack. And these attacks are costly. In 2016, 15.4 million consumers faced identity theft, with an average loss of $1,038.[9] Freezing your credit, regularly monitoring financial accounts, running your credit report annually, and employing third-party credit monitoring services can help keep your identity out of the hands of these cyber criminals.

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[1] https://www.ssa.gov/disabilityfacts/facts.html

[2] https://www.ssa.gov/oact/NOTES/ran6/an2018-6.pdf

[3] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2967775

[4] https://ourworldindata.org/life-expectancy

[5] https://www.aarp.org/content/dam/aarp/ppi/2017-01/Fact%20Sheet%20Long-Term%20Support%20and%20Services.pdf

[6] https://www.genworth.com/aging-and-you/finances/cost-of-care.html

[7]Data from https://www.usinflationcalculator.com/inflation/current-inflation-rates/, using the geometric mean of the inflation rate for the 5 year period between 2013 to 2017.

[8] https://medicare.com/caregiver-resources/survival-tips-for-sandwich-generation-caregivers/

[9] https://www.cnbc.com/2017/02/01/consumers-lost-more-than-16b-to-fraud-and-identity-theft-last-year.html

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

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