Funding a Financial Shortfall


Life is unpredictable, so it’s understandable if you feel you can’t prepare for everything. From losing a source of income to losing valuable possessions, the risk of financial shortfalls are always on the back of our mind. In this article I will outline several pre-emptive and reactionary courses of action to fund a financial shortfall. I will touch on topics from disability insurance to qualified plan distributions to illuminate several options available to fund a shortfall.

Pre-Emptive Measures

Emergency fund – this is the proverbial Swiss army knife of financial funding. It is one of the most important components in a financial plan. Having at least 3-6 months of expected expenses saved up in cash is vital to financial freedom. Whether your financial shortfall is voluntary or involuntary, an emergency fund can be used to cover short term expenses without affecting your tax situation, plans and goals. Just make sure to replenish your emergency fund as soon as possible.

Disability insurance – This can replace a certain percentage of your income if you are currently unable to perform the tasks of your job. There are two different policies, short-term disability (up to 52 weeks) and long-term disability (longer than 52 weeks) and two main variants on the policies called any-occupation (being incapable to fulfill any occupation) or own-occupation (being incapable to fulfill your current occupation).

If you are employed, you may already be covered through your employer. Beside “am I covered at all?” there are several questions you will want to have answered. How much of monthly income will be replaced? How long is the coverage? What is the elimination period? Will the benefits received be taxable to me? Is the policy for any occupation or for my own occupation?

Having 40-60% of your income replaced while you’re unable to work will ease the burden on your emergency fund and extended the opportunity for the cushion you built.

Reactionary Measures

These measures are less effective, but can fill gaps if your pre-emptive measures fall short. Though these sources may entirely fund your shortfall, they often come with a caveat of taxable income, charging interest, or thinning your retirement funds.

Loans- We already use loans to fund major and minor expenses, such as student loans, mortgages, and credit card use. Expanding to a personal loan for other expenses isn’t out of the ordinary. It is important to have a handle on your current debt before taking on anything more. Be wary of the terms of any new debt; high interest rates compound fast and minimum payments aren’t always enough. Opening up an introductory interest free credit card can help small expenses in the interim, but only use it to the extent that you can easily manage the additional debt once your financial shortfall ends.

Qualified distributions- there are provisions in IRAs and 401(k)s for pre-retirement withdrawals. In general, 401(k)s have a 10% early withdrawal penalty if you are under age 59.5 on top of increasing your taxable income. Qualified IRA withdrawals will waive the 10% penalty, unlike a 401(k). Qualified IRA withdrawals include first time home purchase, qualified education expenses, disability, unreimbursed medical expenses, or health insurance if you’re unemployed. There is also the 72(t) distribution from IRAs, which provides a series of substantially equal payments for a minimum of five years. Qualified plans can be used as a last source of shortfall funding, but know that you could be affecting your retirement goals and will still be subject to income tax. That distribution could also miss out on any upswing in the market if not replaced. Consider drawing from cash and brokerage accounts before taking distributions from qualified tax-deferred plans.

Financial shortfalls are a risk to everyone, but there are several options to help address your needs. It is important to tailor your shortfall funding to your specific situation. In general, the pre-emptive measures will be more beneficial and less straining on your financial plan. Not to mention, the peace of mind you can receive from knowing you already have some safety nets in place. I recommend you take the steps to be prepared today, but know you have options if an emergency fund or disability insurance are out of the question. Contact your Relationship Manager if would like to further discuss your financial shortfall needs and preparedness.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for any individual. This information is provided for discussion purposes only, is a summary of certain information, is not complete and is subject to change without notice.  Vantage Financial Partners and its agents are not tax advisors or accountants.  We strongly encourage you review your tax situation, opportunities and liabilities with your tax advisor before making any changes.  This article is not intended as tax advice.

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