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Be prepared for stormy financial weather

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Brendan McDermid/Reuters/File

(Read caption) A commuter struggles with his umbrella as he passes by the New York Stock Exchange during high winds this winter. Here are some tips on how to be bettered prepared to face financial storms.

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On a recent cruise to South America with my wife, we periodically encountered bad weather. The crew would tether furniture to keep it from moving around, and doors would be clicked shut. Passengers were warned to watch their step when the boat was rocking.

We’ll all face bad weather in our financial lives as well, and we can prepare for it.

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Most of us save money to prepare for a good retirement and to offset financial challenges along the way. We might encounter squalls such as an illness, accident or the loss of a job.

Most of the time, we hedge the risk of loss with insurance. We might have disability insurance, health insurance, property-casualty insurance and especially life insurance. All of these products are best used to minimize the possibility of a large economic loss.

I’m often asked how much cash a family should have on hand for bad weather. The answer depends.

An individual with excellent short- and long-term disability coverage needs less emergency cash. A two-income family may need less emergency cash. Certainly, a family with extensive liquid savings needs less cash than one without the savings. Conversely, a single-income family with no disability insurance and little saved should have enough cash on hand to cover several months of expenses.

Every family dependent on one or more incomes should have enough life insurance to provide for the replacement of that income over many years. One of the larger mistakes I see in family planning is inadequate insurance coverage, often when a family is sold whole life insurance rather than level term insurance coverage with an adequate death benefit.

Having a strong, reliable source of retirement income can help a great deal during periods of inclement weather. For example, a retiree with a federal pension that covers his usual expenses needs little emergency cash. In contrast, a family dependent on money strictly from an investment portfolio should have up to three years of expenses in highly liquid and non-volatile holdings.

Other ways to provide for a steady income in retirement aside from distributions from a portfolio include reverse mortgages and various annuities. However, these choices come with their own set of complexities and risks.

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On the ship, the captain had the navigational tools to know when we’d encounter bad weather. Life, in general, is not so predictable. Prepare for bad weather now and you will deal with it with more aplomb when it most certainly occurs.