How to prepare for unexpected financial events and risks

COMMON SENSE TELLS US that it’s impossible to eliminate all risk from our lives, financial or otherwise. We can’t control whether markets go up or down. A divorce, serious illness — or even a large, unexpected bill — could create a financial shortfall that throws your careful plans off track. “A number of life events can risk changes to income or savings and threaten an individual’s or family’s financial well-being,” says Lauren Sanfilippo, senior investment strategist in the Chief Investment Office for Merrill and Bank of America Private Bank.

While you can’t prevent these scenarios, by taking a holistic view of your financial future, your advisor can suggest options for helping preserve your finances from most of them, says Rachel Scholl, managing director, Merrill Lending Sales Executive, Bank of America. Here’s how you might prepare for some of the most common — and risky — what-ifs.

What if you have a sudden need for cash?

Unexpected bills crop up all the time, and the amount due could exceed the cash you have on hand. One recent survey found that the average cost of an emergency expense is $1,700.¹ “We never want to be in a situation where we have to take steps such as liquidating assets at an undesirable time in the market or running up credit card debt to pay bills,” says Scholl.

Ways to prepare: Maintaining a sufficient emergency fund is key, notes Scholl. Review several months’ worth of recent expenses with your advisor to determine how much liquidity you should have readily available for an emergency need and where to keep it. If appropriate, your advisor can introduce you to a team of Bank of America lending specialists to help identify potential alternative funding sources.

What if you’re faced with major medical expenses?

Unplanned medical expenses can be a big blow to your finances. For some, that can lead to cashflow problems — 21% of Americans with a household income of $90,000-plus find it difficult to afford their healthcare costs.²

Post retirement, the costs can be even steeper. A nursing home stay could cost more than $100,000 per year, and hiring a home health aide for roughly six hours per day could cost more than $6,000 per month.³ “Seven out of 10 Americans turning 65 today will have some health event for which long-term care is necessary,⁴ and the cost can decimate savings,” says Robert Murray, director, insurance relationship manager, Retirement and Personal Wealth Solutions at Bank of America.

Ways to prepare: Check if your employer offers a flexible spending account (FSA) or a health savings account (HSA); both are tax-advantaged accounts that allow you to pay for healthcare expenses with pre-tax funds. The HSA — available only for those with high-deductible health plans — can be particularly valuable because unused funds can remain in the HSA until your death (and in some cases beyond) and earnings can grow tax-free. “Instead of dipping into your IRAs to pay medical bills in retirement and possibly paying income taxes on those withdrawals, you can tap an HSA tax-free for medical expenses,” says Paul Galliano, senior vice president, Workplace Benefit Solutions for Bank of America.

Consider a long-term care insurance policy to help preserve your wealth and that of your children, who often shoulder the costs of caring for aging parents.

Or think about a trust, which can help ensure the uninterrupted availability of assets for your care should you become mentally or physically incapacitated, says Jen Galvagna, head of Trust, Estates and Tax, Bank of America Private Bank. “A trustee can step in and pay medical and long-term care bills and manage all other aspects of your financial life and estate.”

What if there’s a divorce or other unexpected loss of income?

Nobody wants to think about — let alone plan for — a dramatic change in their household’s income from divorce, disability or even death. Yet the rates of dissolved marriages among those 50 and over have risen since the 1990s,⁵ forcing many to adjust to a single income as they near retirement. The chances of being forced to stop working due to disability rise with age as well. For example, a 50-year-old is more than twice as likely to need Social Security Disability Insurance as a 40-year-old is.⁶

Ways to prepare: In the event of a marital split, be aware that the laws governing the division of property in a divorce vary from state to state. Keeping an up-to-date inventory of your household assets and debts can help you divide them equitably. In advance of remarrying, consider setting up a trust to help protect your family, suggests Galvagna. With a trust, you can ensure that children from a prior marriage are not overlooked as the eventual beneficiaries of your estate while also providing lifetime support to a surviving spouse.

When it comes to disability, insurance can be a crucial consideration. Find out whether your employer offers long-term disability income insurance. If not, consider purchasing your own policy to replace at least a portion of your income

Finally, the death benefit from a life insurance policy can help keep your family solvent should you or your spouse die prematurely.

What if there’s a bear market?

It’s hard to watch your savings shrink at any age. But bear markets may be the riskiest for investors who need to start withdrawing from their savings soon, perhaps to pay for college tuition or to fund retirement.

Ways to prepare: First, make sure that your portfolio is well diversified. This means increasing diversification across asset classes, within asset classes and across geographies. “A wider breadth of investments may provide an expanded opportunity set while potentially minimizing losses to your overall portfolio and wealth,” says Sanfilippo.

“It’s important to take the time to review investments regularly and adjust according to your time horizon,” Sanfilippo adds. For instance, a college savings portfolio may be invested for maximum growth when college is 18 years away, but it may be better off in all cash when college is imminent to help reduce the risk of a market drop. Your advisor can suggest a strategy that’s appropriate for your age, goals, liquidity needs and ability to handle risk.

What if you lose your job?

Not only can an unexpected job loss affect your future earnings potential, but it can also deplete your savings and threaten your short- and long-term financial goals.

Ways to prepare: Make sure you have enough funds to last three to six months to give you time to find a new job. Build up savings accounts and other liquid investments such as money market funds, which you can tap into for extra cash. 

Keep in mind that if you rely on an employer-sponsored healthcare plan, you’ll also have to come up with a strategy to maintain insurance coverage. You may be able to join a partner’s plan, pay to continue with your former employer’s group plan for up to 18 months under COBRA or shop healthcare.gov or your state’s health insurance exchange, if it has one.

What if you need an unexpected home repair?

As any homeowner knows, along with the financial benefits and comfort of homeownership can come potential headaches. A leaky roof, a broken furnace or a plumbing emergency can put your life and budget in disarray.

Ways to prepare: A source of funding for unexpected repairs may be your home itself, says Scholl. “There are so many ways you can use home equity to improve your home,” she says. Those include tapping that equity with a home equity line of credit, which may carry lower interest than what you’ll pay on credit cards or other personal loans.

And you may have more equity to work with than you realized: As of the second quarter of 2024, total equity for homeowners with mortgages was up nearly 8% over the past year, according to the real estate research firm CoreLogic.⁷ But keep some potential drawbacks in mind: If your loan has an adjustable rate, your payments could rise (and fall) over time, and if you don’t pay back what you owe, your house could be at risk of foreclosure.

No one can anticipate every event that life throws our way. Work with your advisor to address any number of risks that can potentially threaten your financial security, says Scholl. Together, you can put plans in place to help prepare for nearly any eventuality.