Common Risks to Your Financial Freedom (and How to Avoid Them)

Talk to one of our experienced advisors today to learn more about securing your financial freedom!

5 Minute read
Originally published: January 24, 2022
Updated: July 28, 2023

Heart condition factors that affect life insurance. The type of condition, how serious it is, how it’s managed, your family history, and symptoms are all factors considered.

Talk to one of our experienced advisors today to learn more about securing your financial freedom!

5 Minute read
Originally published: January 24, 2022
Updated: July 28, 2023

The 3 Most Common Risks to Your Financial Freedom (and The Solutions to Avoid Them) [2022]

Are you tired of feeling constrained by your financial situation? In today’s fast-paced world, achieving financial independence can seem like an overwhelming challenge. Canadians face numerous obstacles, from mounting debts to unpredictable economic conditions, that can impede their path to financial security. However, it is important to remember that there are proven strategies and techniques that can help you mitigate these risks and pave the way to a life of financial freedom. In this comprehensive guide, we will delve into the three common roadblocks that hinder financial success in Canada, providing expert advice on how to overcome them.

What are the 3 common risks to financial freedom?

What are the 3 common risks you may be asking? Well, to put it simply, the 3 risks to financial freedom are:

  • Living too long
  • Dying too soon
  • Becoming critically ill or disabled

Living too long

Living longer is a blessing, but it also presents unique challenges when it comes to retirement planning. One might ask: “Why is living too long a risk to my financial freedom?” Although living a long full life is quite the blessing, there can be some tough financial strains for those who find themselves living for multiple decades after their retirement. With increased life expectancy, you need to ensure that your savings will last throughout your retirement years. Most Canadians tend to retire at 65 while others do it earlier or later, unfortunately CPP and retirement benefits like OAS and GIS simply aren’t enough for many to sustain a comfortable financial situation for decades to come.

Dying too soon

Unfortunately, it is very common that people die earlier than expected due to unforeseen circumstances. This can be a huge burden on those who have a family or loved ones that they take care of, those who have debts, or those who have a mortgage and other large financial responsibilities.

Ask yourself, have you actually protected yourself against each of these 3 areas? If your answer is no, please find below the 3 most common risks to your financial freedom, and how to protect yourself from them.

Becoming critically ill or disabled

Although it is out of anyone’s control, the possibility of getting sick or disabled is quite high in Canada whether it may be from unhealthy lifestyle choices, hereditary conditions, or accidents. There are huge financial strains from critical illness and disability. Ask yourself: if the primary or secondary income earner in your family is you and you become critically ill or disabled and are unable to return to work, are you and your family financially protected?

Risk #1—Living Too Long

When planning for retirement, it’s important to consider a variety of factors, such as your desired lifestyle, healthcare needs, and potential long-term care costs. As modern medicine advances, Canadians are living longer lives which require a different type of planning than in years past. For many retirees, I meet at my office in Dundas, or chat with virtually, the #1 concern they have is: “am I going to run out of money?” The chances are honestly slim, lots of Canadians don’t open an RRSP early enough nor do they maximize their contributions year over year either. Thus, there can be a nice retirement savings from their RRSP or LIRA but maybe not enough to last you for multiple decades after you retire. The OAS/GIS and CPP that is provided by the government is a small amount of income which truthfully is not enough for many who might be continuing to support their families, pay off their mortgages, or have any outstanding debts. 

As you age, healthcare costs can become a significant financial burden. Medical expenses, including prescription drugs, doctor visits, and long-term care, can quickly deplete your savings if you’re not adequately prepared. Therefore, it’s crucial to plan for rising medical expenses when creating your retirement budget. One way to plan for healthcare costs is to invest in a health savings account (HSA) or a similar tax-advantaged account. HSAs allow you to save pre-tax dollars specifically for medical expenses, providing a tax-efficient way to set aside funds for future healthcare needs. Another significant risk is inflation risk. Over time, the cost of living tends to increase due to inflation. If your retirement savings are not growing at a rate that outpaces inflation, your purchasing power will erode over time.

Solution #1: Consider Investing

Fortunately, company and government pension plans help assist with ensuring lifetime incomes, along with investment solutions that can ensure that one never runs out of monthly cash flow. When I discuss investment options with clients, it is critical that I ensure we do a cash flow analysis to understand what income is required and what we can do to ensure that it lasts a lifetime. Product solutions are offered by many financial institutions, such as principal protected note investments, annuities or permanent cash value life insurance policies can help supplement income to avoid the risk of outliving your money. To protect against inflation risk, it’s important to invest in assets that have the potential to generate returns that outpace inflation, such as stocks and real estate. Additionally, consider options like annuities that provide a guaranteed income for life. Annuities can be a valuable tool in protecting against the risk of outliving your savings, as they provide a stable income stream that continues for as long as you live.

Contact Protect Your Wealth today to learn more about investments to protect your financial freedom! 

Risk #2—Dying Too Soon

Unfortunately, the saying “life is short” can have a literal and devastating effect, both emotionally and financially, for your surviving loved ones. The surviving family members may find themselves struggling to cover everyday expenses, such as rent or mortgage payments, utility bills, and groceries. While nobody can be replaced, ensuring there is a plan in place to protect against financial loss in the case of your death is extremely important. Typically, this risk can be addressed by some form of life insurance. Recently I met a couple from Burlington who had 2 young kids aged 5 and 3, and only one spouse was working. The working spouse is self-employed, and neither spouse has any sort of life insurance. If something were to happen to either spouse where there was premature death, that would leave the surviving spouse in difficult financial circumstances, because they are without life insurance. At the same time, if something were to happen to the stay-at-home spouse, this may require the working spouse to take extended leave from work, seek childcare from elsewhere and other financial burdens.

However, this risk of course varies at different life cycles. The retirees I meet do not have the same risks associated as a family with young children. These retirees are still susceptible to being financially impacted by the premature death of a spouse. For example, a reduced pension due to premature death could leave the surviving spouse in a devastating financial situation. Whatever the situation, this risk must be addressed.

Furthermore, healthcare costs in Canada are also a significant concern. While Canada has universal healthcare, there are still expenses that are not covered by the government. Prescription medications, dental care, and specialized treatments can all add up, especially for individuals with chronic illnesses or disabilities. When a breadwinner dies, the financial responsibility for these healthcare expenses may fall on the surviving family members, placing an additional burden on their already strained finances.

Solution #2: Finding the Right Life Insurance Policy

Luckily, there are ways to plan for premature death and to secure the financial future for your loved ones. The solution to not risking the financial freedom of your loved ones is to get a life insurance policy that is personalized to best fit you. There are many different kinds of life insurance policies that fit a variety of cases and meet a variety of needs. Life insurance is crucial to ensure that in the case of your death, your loved ones are not left behind with financial burdens. Consider these situations: maybe your children want to attend post-secondary education, maybe your mortgage is not fully paid off, or maybe you simply want to leave money behind to ensure your loved ones do not struggle after you pass away. All of these situations, and many more, would not be a burden if you have life insurance to ensure that your family’s financial freedom is not at risk.

Life insurance can help cover the hidden costs of dying too soon by providing financial support to your loved ones when they need it the most. The lump sum payout from a life insurance policy can be used to pay for funeral expenses, including the cost of a burial or cremation, memorial services, and other related costs. This can alleviate the financial burden on your family during an already difficult time. Additionally, life insurance can help pay off outstanding debts left behind by the deceased. This includes mortgages, car loans, credit card debts, and any other financial obligations. By relieving your loved ones of these debts, life insurance provides them with the financial freedom to move forward without the added stress of financial burdens.

To learn more about if life insurance is right for you, read our article on 10 reasons why a person would need life insurance or contact us for professional advice in picking the life insurance policy that is right for you.

Heart condition factors that affect life insurance. The type of condition, how serious it is, how it’s managed, your family history, and symptoms are all factors considered.

Risk #3—Becoming Critically Ill or Disabled

Another one of the common risks to your financial freedom includes becoming critically ill or disabled. One of the most significant financial impacts of this risk is the loss of income. Many individuals with disabilities face reduced earning potential due to their condition. This can be a result of being unable to work full-time or having to take extended leave to manage their health. As a result, their income may be significantly lower than what they could earn if they did not have a disability.

From my many years in running a financial planning and insurance practice, most often clients typically focus on ensuring against the first risk of living too long, are aware of the risks of dying too soon, but most often miss the 3rd greatest risk—getting sick or disabled. Yet, statistics show you are far more likely to get sick or injured than dying too soon.

Ask yourself, if you were to get sick or injured due to accident or illness, would you be able to survive financially? What if you were off 1 month or 3 months or a year or for many years? The same couple I discussed above from Burlington, has a significantly higher risk of the primary earner getting sick and not being able to work, then prematurely dying. Yet, most advisors and clients are so focused only on addressing one area of concern and overlook the reality of getting sick or becoming disabled.

Solution #3: Get Critical Illness and/or Disability Insurance

Critical Illness and Disability Insurance policies help protect against this very evident risk. The reality is that these policies are more expensive than life insurance policies. The reason I tell clients is they are good policies that work and have a far higher likelihood of paying out over a life insurance policy. Usually, the costs associated is the greatest deterrent. The average cost for a disability insurance policy is 2% of income. However, ask yourself, would you rather get paid 98% of what you earn today and ensure you continue to receive that income, or would you like to roll the dice and receive 100% today and 0% if you were to get sick or disabled?

Critical illness policies can be structured with many different features and, like life insurance policies can be for a 10 year or 20 year term or level cost for life. Unlike life insurance policies, critical illness policies have return of premium riders (benefits) which allow the insured to receive back 100% of premium paid if they do not get sick and would like their premiums refunded after a certain period of time.

Similarly, disability policies can be adjusted in many different ways to reduce premiums, while ensuring the right coverage is in place. Options like increasing the wait period, extending the benefit period or amending occupational classification can help reduce costs. 

Building an emergency fund is also a crucial step. Having a reserve of savings can help individuals weather unexpected expenses or periods of reduced income. Aim to save at least three to six months’ worth of living expenses to provide a buffer in case of emergencies. In addition to an emergency fund, individuals with disabilities should also consider long-term financial planning. This may involve setting up a Registered Disability Savings Plan (RDSP), which is a tax-sheltered savings account specifically designed for individuals with disabilities. Contributions to an RDSP are not tax-deductible, but the growth and withdrawals from the account are generally tax-free. 

With any type of insurance, it is best to sit with a licensed advisor to discuss your needs. Contact us now to see if Critical Illness or Disability Insurance is right for you, also read our article to find out if Critical Illness Insurance is right for you

Avoid These Common Risks to Your Financial Freedom, Contact Protect Your Wealth Now.

Read our blog post about How to Get the Best Life Insurance Policy and Rates in Canada to find out what kind of life insurance is right for you, and find one that makes sense for your financial situation. Consider the different kinds of critical illness and disability insurance in Canada by reading our Disability Insurance in Canada Guide.

Navigating the world of life insurance and financial planning can be overwhelming, which is why seeking professional advice is crucial. A financial advisor can help assess your financial needs, evaluate different life insurance options, and guide you towards an appropriate policy that aligns with your goals. Ask yourself, are you protecting yourself and your loved ones from these 3 most common risks to your financial freedom?

To schedule a consultation about your income protection goals, or if you have any questions about insurance in Ontario or Canada, please contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Ontario, British Columbia and Alberta including areas such as Kingston, Calgary, and Victoria

Talk to an advisor today.

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