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Your Life-Crisis Money Plan

How to get ready for the worst that could happen.

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."

Must Do #2: Save Already!

The Parkers' income slowed to a trickle in 2003. Each month that they couldn't cover their expenses, the couple dipped into retirement accounts. Eventually those, too, evaporated.

The planner's checklist always starts with saving for emergencies, and the time to build savings is always today—while you still can. Job loss does come without warning: in AARP Financial's survey, 26 percent of those thrown out of work had less than a month's notice; another 42 percent had none. And 35 percent of respondents don't have six months of expenses set aside, a prudent level for many households.

Must Do #3 Work Your Network

The Parkers did this much right: they told everyone they knew about their plight. "A lot of people are too proud to tell anyone, but people can't help you when they don't know you need help," says Myra, who picked up some business through friends, former coworkers, and members of the church she and Dennis attend.

Stephen M. Pollan applauds such openness. "You have to find a way to harness the emotional energy," says Pollan, author of Lifelines for Money Misfortunes (Wiley, 2007). Life crises "are emotional explosions that put you into shock. Other people help you find a way to clarity and objectivity."

Myra and Dennis were also smart to maintain the proper certifications that would allow them to regain employment in their chosen fields. Last year, after five and a half years of underemployment, Myra again found full-time work selling insurance.

DISABILITY

Kim Sherburne was teaching a nursing class when she realized she'd left something in her car. Running to retrieve it, she fell on her knee. That was in 1998.

"They did arthroscopic surgery, and I don't know if it was an exercise or a fluke in rehab," she recalls, "but I developed reflex sympathetic dystrophy."

RSD is a little-understood nerve disorder that can cause severe, incessant pain. Therapy got Sherburne, who lives in Mansfield, Ohio, back to working part-time, but in 2007 she fell again, breaking the leg she had injured before. RSD returned with a vengeance.

Must Do #4 Cover Your Assets

"I just never thought anything would happen to me," Sherburne, now 49, laments. "I have that complex that nurses have. We figure we're here to take care of everybody else. We can't get sick."

That mindset isn't unique to nurses, says Peg Downey, "but people need to realize that their most important asset is their earning power. You can't protect that with anything but insurance."

Fear keeps us from looking at money objectively, says Spencer Sherman: “Fear makes us impulsive. We say, ‘Things will just work out.’”

In AARP Financial's survey, 84 percent of folks under 60 have life insurance, but only about two-thirds have disability coverage. That's a risk. Major illness or disability ranked second only to job loss as a financial hardship.

Although many employers offer disability insurance as a benefit, it's good to examine the exact terms before deciding you're adequately insured. A policy's value hinges on, among other factors, the portion of income it replaces (anywhere from 30 to 70 percent), any waiting period or dollar cap, and how disability is defined. For individuals the cost can be a daunting 2 to 3 percent of income. That makes comparison shopping a must.

Sherburne is now seeking disability benefits from the Social Security Administration, which covers those totally unable to work. Her initial claim and first appeal were rejected, which is common, and while she believes she will eventually succeed, in the meantime she's barely scraping by.

DIVORCE

Jeff Condon never saw it coming. The 47-year-old attorney from Santa Monica, Calif., knew his marriage had strains, but he thought the tension was normal—the type that all couples have-—until one day his wife said she'd had enough. Since then the two have battled over the family home, their kids—even trips to Dodgers games. Over three years, he estimates, they've spent $250,000 fighting each other.

Must Do #5: Be an Equal Partner

As financial-planning goals go, defending against divorce shouldn't be high on the list unless you start a marriage with wealth to protect. Then you may need a prenuptial agreement and trusts. For the rest of us, the safeguard against an ugly divorce may be simple good habits of budgeting and investing together, which teach couples not to fight over money.

"I'm a big proponent of spouses' jointly managing their affairs, especially if one does most of the earning," says Spencer Sherman. "We all want to be heard."

As a practical matter, both spouses should establish credit, says Mark Brown, a financial planner in Denver. "You'll want a credit card so you can rent a car or reserve a hotel room," he notes.

If divorce happens, the habit of sharing money decisions will help. Jeff Condon has written two books on estate planning. That makes him a respected expert in his own right. But he admits that his personal life provides a cautionary tale: "Friends have said, 'Whatever we do, we don't want a divorce like the Condons'.' "

DEATH OF A SPOUSE

For most of her 34 years of married life, Vera Jordan tended to her own career as a staff coordinator at a medical center in Anniston, Alabama. After retiring, she helped Arlin behind the counter at the service station. "He was a grease monkey by trade and loved it," she says. "I knew how to start the car, and that was it."

Then Arlin was told he had months to live. As it turned out, he had three.

Must Do #6: Prepare to Act

Running a spouse's business can be a heavy burden. Some backup plan for any business is an essential part of estate planning. Arlin's service station was a sliver away from bankruptcy, Vera recalls. From his bed, Arlin briefed her on everything from how to operate the tow trucks to environmental regulations she needed to comply with.

Vera coped. She says she didn't have time to feel sorry for herself. "Arlin and I spent hours talking about practical things, and that helped us both."

The ability to act—to not freeze—is a great help in facing crisis, says Stephen Pollan. Most fears and stresses come "from between your ears," he says. "You're not worried about what's happening now. You're worried about something that may happen tomorrow."

"Focus on making today a good day," he counsels. "One of the best ways of eliminating fear is to stay in today. Tomorrow will wait for you."

After Arlin's death, Vera had the station's $400,000 debt to deal with. "It's not a disgrace to be in financial distress," she says. "I think everybody gets there at one time or another. It's only a disgrace if you don't try to get out of it."

Making do with $2,000 a month in pensions, Vera worked out payment plans with every creditor and later sold the business, getting enough to break even. Today she says she's grateful for those last days with Arlin.

"When you have been married for as long as we had, you sometimes take each other for granted," she says. "We didn't take each other for granted at all in those final three months."

Kathy Kristof is a syndicated personal-finance columnist. A new edition of her book Investing 101 (Bloomberg) came out last year.

For black-and-white reprints of this article, call 866-888-3723.

*Statistics source: Telephone survey of 1,200 people ages 40-79 conducted 10/9/2008-11/8/2008; margin of error +/- 2.8%

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