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Your Life-Crisis Money Plan: How to Get Ready for the Worst That Could Happen

Suppose you lost your job, your health, or your spouse. Could you cope?

You may think you're prepared for any life crisis—but are you really? The day before his 65th birthday, Vera Jordan's husband, Arlin, noticed blood in his urine. Three months later he was dead of kidney cancer. For Vera there was little time to grieve: she needed to save his service station from bankruptcy.

"The only thing he ever cried about was leaving me in the mess I was in," says Vera, 71, who struggled to keep the business afloat long enough to sell it. "There were times I told God He had given me more than I could handle."

Every year millions of us face a fateful turn of events—an illness in the family, the death of a spouse, divorce, disability, job loss. And for many, the resulting tension and sadness are only heightened by financial pressures. Can I pay the bills? Hold on to the house? Who can I trust to help me manage?

Now that the U.S. economy is in a crisis of its own, this sense of emergency isn't confined to folks who suffer a sudden reversal. Maybe your cushion of home equity has thinned. Or that stable career no longer seems a sure thing. Then there's your retirement fund, the Amazing Disappearing Nest Egg. If life threw you a curve now, would you, like Vera Jordan, be scrambling for cash?

For two of every five older Americans, the answer is an unfortunate yes. A new survey, sponsored by AARP Financial, of adults 40 through 79 examined how we prepare for and react to the worst life has to offer. What it found should ring alarm bells. In this nation of optimists, the study shows, we're often overconfident before trouble strikes—and left shaken afterward.

Take job loss: among those who have never known unemployment, 32 percent say they are "very prepared" to handle its financial impact. Yet only 12 percent of those who've actually been jobless look back and rate their readiness so highly. A more common reaction: 44 percent were angry at themselves for not having been better prepared. Overall, half of those surveyed who had weathered a life crisis called the financial impact they experienced "very significant."

57% of adults 40 through 79 have been through at least one life crisis.

"Let's face it," says Richard Hisey, president of AARP Financial, the financial-services subsidiary of AARP, "it's hard enough to contemplate these scenarios, let alone plan for them. At the same time, the reality is: sooner or later most of us land in crisis. A little preparation can go a long way."

So it's time to plan. Let's get started.

JOB LOSS

Myra Parker, 52, wasn't worried when she lost her job at an insurer in 2002. She had a severance of $45,000, unemployment benefits, a working spouse, and a sideline selling prepaid plans for legal services. But a year later her husband, Dennis, 65, a truck driver, was also laid off. "Then we were in a crunch," says Myra, who lives in Chalfont, Pennsylvania. "I had blown my severance enjoying life and doing home improvements. My problems were of my own making."

Must Do #1: Imagine the Worst

Just as she never guessed Dennis would be jobless, Myra didn't think it'd take years to find adequate full-time work.

"People always think bad things will never happen to them," says Peg Downey, a financial planner in Silver Spring, Maryland. "It makes our job really difficult because we come off as gloom-and-doomers."

People's optimism often masks fear, notes Spencer Sherman, author of The Cure for Money Madness (Broadway Books, 2009). "Most of us don't know how to look at our money objectively. What we bring to finances is fear, and fear makes us impulsive. We make decisions without checking the numbers. We say, 'Things will just work out.' "

That makes a gulp-inducing scenario a useful exercise. Sherman has clients plan a life with just half their money. "If you face your worst fears, you won't be immobilized by them," he says. "And you may surprise yourself. It refocuses you on what you really value."

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