When things go wrong or when the unexpected happens (like all of 2020) we want our clients to feel that they’re prepared. This is why we help build a “Cascade Catastrophe Plan.” With this plan in place, our doctors are able to take financial obstacles in stride without throwing off their whole retirement plan.

The Cascade Catastrophe Plan is based on the ancient Roman invention: the aqueduct. Aqueducts consisted of multitudes of water pipes, some led to fountains, some gardens, and others dedicated to drinking water. They could be used in conjunction, or certain avenues of water could be redirected if there was a water shortage anywhere. We’ve talked in previous episodes about disability insurance and life insurance. These are great tools to help protect you and your family if the worst were to happen, but what if you lost your job or your hours were cut? What if a sudden injury or illness left you with large hospital bills? This is where the Cascade Catastrophe Plan comes into place. We can redirect funds and pull assets from multiple places to help you where you need it most.

No one expected so many doctors to be furloughed or laid off in 2020 and 2021, but for our clients, we had prepared catastrophe plans to make sure they had everything they needed until hospitals and doctors’ offices were ready to safely re-open. Usually when we put together these plans we are not anticipating a world-wide pandemic, but our individualized plans are designed to help protect doctors from minor financial setbacks and worst-case scenarios. We break down the plan into seven sections, and pulling money out in order, from section 1-7, will allow you to access the funds with as little penalties as possible. Each section varies in accessibility and the possibility of interest growth.

Section #1: “The Emergency Fund”

This is the typical emergency fund you think of: an account at a bank that is easily accessible; a common savings account works best to start for this first stage of our plan.
- Note that these accounts make very little in interest, usually around 0.6%, and won’t keep up with inflation or buying power.
When looking for the correct amount to put in this fund, we have found it should be roughly the equivalent of 3-5 months of fixed living expenses. While 6 weeks is the average transition time between jobs for doctors, we want our doctors to feel secure and that they have plenty of time to search for their next career. This is why we recommend months instead of weeks.
- The exact amount varies per client, but this money is used for bills, mortgages, student loans, food, transportation, day care, etc. This is not money to pay for a family vacation or re-decorate your living room.
This would be the first fund we dip into when an emergency arises; it’s easy to access and easy to replace when life returns to “normal” with no tax implications or fees. And we have no fears it will lose money since this money is not invested.

Section #2: “The Intermediate Account”

Think of this as a “put and take” account. We put money in, and we take money out.
These funds are in a taxable “non-qualified” brokerage account that we earmark for large purchases in the next 2-8 years, or for a back-up emergency fund.
- For instance, some doctors want $100,000 in an emergency fund; in our opinion, this is too much to keep in a bank account. We suggest taking ½ and putting it in this intermediate account for a back-up emergency fund.
Most often we use an account that is 25% stock and 75% bonds.
We aim to earn more interest than the bank in this intermediate account. Any time we can do better than 0.6%, we consider that a big win. Historically we have averaged 2-6%, depending on the time frame.
Like the funds in section #1, we do not include the money in this account into our retirement plan projections, as we expect our clients to use the money in this intermediate account for children’s education, weddings, trips, home purchase, new car, or other earmarked large expenses.
This is the second place we will draw from in the case of an emergency. These funds are highly liquid with no surrender charges or penalties for withdrawing the money. The only charge may be a small trading charge

Section #3: Home Equity Line of Credit (HELOC)

Given that interest rates are so low, see if you can get a home equity line of credit.
Right now, HELOC is a good thing to do, even if you don’t ever need to use it.
You can use the funds to help with major repairs on your home, and also, a HELOC can be used as an asset protection measure. It’s considered a lien against your home, even if you haven’t accessed the funds.

Section #4: “The Wealth Accumulation Account”

Think of this as a “put and keep” account.
This is another taxable, “non-qualified” brokerage account, but we earmark these funds for retirement.
The difference here is that we are making riskier investments with this account as we do not expect to need the funds until much later in life.
If this is a non-home-related emergency and it has you using up our first two stages, we would take funds from here and skip Section #3. Like the intermediate account, there are no fees associated with removing the money, but this account is used in our retirement plan projections.

Section #5: “The Traditional Retirement Accounts”

These are your 401Ks and 403Bs. Many of these accounts come with the ability to borrow up to a certain cap, usually the smaller of 50% or $50,000.
These accounts are the next place we will go for funds in an emergency. There are no fees for borrowing within the limits, but you will be required to pay yourself interest on the loans.
Not all plans allow for borrowing, so it’s best to look at yours first.

Section #6: “The Investment Insurance Account”

These are investment-grade life insurance policies, such as whole life or universal life insurance.
Most of these policies will allow you to borrow from them and use the cash value as collateral. Depending on the product, this can be a great solution, or a terrible one.
Specific policies will have different borrowing limits and payback rules.
We evaluate these on a case-by-case basis to decide if this is an appropriate option for emergency funds.

Section #7 “The IRAs and Post-Tax Accounts”

Any Roth accounts or IRAs fall into this category. Additionally, 529 plans can be included here, if needed.
You can’t borrow from these accounts, but you can withdraw the funds.
These are a “last resort” option as there are high penalties for removing funds before age 59 ½, plus there are ordinary income tax dues on the gains.
If you use funds from a 529 for anything other than education expenses, there are penalties and ordinary income taxes taken out of the funds withdrawn.

We want to make sure our doctors can focus on their patients and not worry about what would happen to them if they couldn’t work. Take a minute to go through your various accounts and do a rough calculation on how much money you could access within a few days if you found yourself in a tough situation. If you have questions or would like to talk to us about how much is enough for your specific emergency fund, please feel free to reach out. We are happy to help.

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Remember that you can send us any questions or potential topics at: Info@MDFinancialAdvisors.com

Katherine Vessenes, JD, CFP®, is the founder and CEO of MD Financial Advisors who serve 500 doctors from Hawaii to Cape Cod. An award-winning Financial Advisor, Attorney, Certified Financial Planner®, author and speaker, she is devoted to bringing ethical advice to physicians and dentists. She can be reached at Katherine@mdfinancialadvisors.com.