MW How to financially prepare yourself for a natural disaster

By Richard Eisenberg

All these moves are especially critical for people in or near retirement

Odds are, you know someone who has been a victim of a natural disaster in the past few years or have been one yourself.

I speak from personal experience: My two Los Angeles-area sons, their wives and our baby granddaughter had to evacuate in January due to the horrific wildfires.

Since 2020, we've seen more than 115 weather or climate disaster events with losses over $1 billion apiece. Fires, storms, floods and cyclones have been like a plague. Are you ready if one comes for you?

"It used to be that natural disasters were rare. They're no longer rare; they happen all the time," Mitch Freedman, founder of MFAC Financial Advisors in Westlake Village, Calif., said on a recent episode of the "Friends Talk Money" podcast I co-host.

"In Florida," Freedman added, "we've seen lightning strike twice in the same places a year or two apart. So, everybody really needs to be prepared for the potential."

There are a number of things you can do, however, to prepare yourself financially against the possibility of a natural disaster. And there are other steps to take if one does strike where you live. All these moves are especially critical for people in, or near, retirement with homes, possessions and loved ones to protect.

A recent DLC Law study calls Texas, California and Minnesota the states with the greatest likelihood of future natural disasters - Texas for tornados, California for wildfires and Minnesota for floods.

Jeff George, founder and principal of Tao Financial in Orlando, Fla., said: "I think what we've learned through the last few natural disasters is they're affecting a larger swath of people. And with the inflation we've had, the cost of the damage being produced is growing exponentially."

Read: Climate-change risks have some retirees asking: Is anywhere safe to retire now?

What to do before a natural disaster hits

If you own a home, the first, and most important, financial step to take in advance of a natural disaster is ensuring you have appropriate homeowners insurance.

"Years ago, it didn't matter which company you went to, but today, a policy can be very different from company to company," said Freedman. "You may even have options within a company as to what you can buy and what kind of endorsements you might be able to buy."

That said, some insurance companies are pulling out of areas they consider high risk, which could make your choices slimmer than in the past. As a result, some people looking for homeowners insurance - especially retirees and preretirees who want coverage for second homes or for houses in areas they'll move to in retirement - wind up purchasing coverage through a state insurance plan.

These plans are often called FAIR plans (Fair Access to Insurance Requirements) and are available in popular retirement states like California, Florida, Hawaii, New York and North Carolina. Their protection is generally more limited and more expensive than standard policies.

You could purchase an actual cash-value homeowner's policy, where the insurer subtracts depreciation when determining how much to pay to repair or replace damaged property.

But it's often wiser to buy a replacement cost policy, said Alonso Rodriguez Segarra, a Certified Financial Planner with Advise Financial in Boca Raton, Fla. This type is more expensive but pays an amount you'd need to rebuild or replace what was lost based on its current market value.

The policy should cover at least 80% of your home's replacement cost. "If you're not insuring at least 80%, you're going to be subject to coinsurance and the amount that gets paid out is going to potentially be a lot less than you thought you were going to get," said George.

Take the time to read your policy to see what it does and doesn't cover.

"Most homeowners are going to have an HO3 policy, which effectively excludes certain perils like floods and earthquakes," said George. But you can often add endorsements for these exclusions or buy separate flood insurance or earthquake policies, he noted.

You'll also likely want to have insurance riders to cover valuable possessions such as art, musical instruments, jewelry, collectibles and expensive clothes.

Two provisions George said you'll want your homeowner's policy to have: loss of use and law and ordinance coverage.

A loss of use provision means the insurer will help cover costs if you need to move out due to a disaster. A law and ordinance provision, especially important for older houses, means the insurer will pay to assure your home reconstruction is compliant with local building codes.

"Our property was built in 1969. So, if it burned down, I guarantee it would not be up to code," said George.

You'll also want to have documentation of valuable items in your home. So, take photos of videos of them and keep purchase receipts.

Be sure this documentation is readily accessible if you'll need to flee in a disaster. The same is true for your financial records, online account passwords, contact information for financial advisers, passport, Social Security card, insurance policies, wills and trust documents, advance directives and the like.

Although you could keep these things in a home safe, there have been reports that safes burned during the California wildfires.

"Even fireproof safes can melt," said Freedman. "And documents and assets that might be stored there can be demolished or destroyed."

A better idea: store copies and images of these essentials in either the cloud, a bank safe-deposit box or an electronic software program like Quicken's LifeHub (cost: $1.99 a month).

A few strategic steps to take:

-- Plan an escape. This includes knowing where you'd go in a hurry, how you'd get there, who you might call for assistance and how to reach them.

-- Put monthly bills on autopay. This way, you won't miss a payment to a utility company, mortgage provider or others because the bill came in the mail and you couldn't get it.

-- Have a go bag. This should include things like water bottles, nonperishable food, a flashlight with working batteries, a first aid kit, dust masks, a cellphone charger, travel-sized toiletries and enough clothes for a few days. The Federal Emergency Management Agency site has a more detailed list, as does AARP.

Just before you leave with the go bag, throw in your passport and medications (pills for your pet if you have one, too).

What to do after a natural disaster hits

If your home is damaged or destroyed due to a natural disaster, contact your insurance agent immediately.

"The key is to get your claim in so the insurance company has you early in line," said Freedman. "That way, when it comes time to process your claim, you'll be near the top of the list of policyholders to assist."

If you don't have a total loss, you may want to hire an independent adjuster as your advocate getting the appropriate reimbursement from your insurer.

"After our Malibu fire, when our house was damaged severely, I told my kids - one who's a CPA and one who's an attorney - 'I'm going to handle it,'" said Freedman. "My children said, 'Dad, we know you can do it, but this is a second job.'" The three of them worked together to find an adjuster with an excellent track record.

An adjuster's fee (typically 5% to 20% of what the insurer will pay you) comes out of your reimbursement. You can find a list of adjusters at the National Association of Public Insurance Adjusters website.

After a natural disaster, you may qualify for a postponement for filing and even paying your federal and state taxes.

The Internal Revenue Service $(IRS)$ is giving victims of the recent California wildfires until Oct. 15 for their 2024 taxes and the choice of claiming a casualty loss on their 2024 or 2025 returns. North Carolina residents affected by last year's Hurricane Helene have until May 1 to file and pay their 2024 taxes.

The IRS site has a state-by-state list of tax dates for people who've experienced natural disasters.

You'll be able to claim a casualty loss without itemizing deductions if your area was declared a disaster by the president, too.

The Secure 2.0 law lets you take a financial hardship withdrawal of up to $22,000 from an IRA or retirement plan after a natural disaster avoiding the standard 10% penalty if you're under 59 1/2.

Read: You can now use your 401(k) to rebuild after a natural disaster - but should you?

You might also be able to take a loan against your 401(k) to cover expenses related to the disaster - up to 50% of your account value or $50,000, whichever is less.

"I would go with a loan over a hardship withdrawal in most cases," said George. "With a loan, you can pay it back without a tax consequence. A hardship withdrawal waives the penalty, but not the taxes."

-Richard Eisenberg

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March 03, 2025 17:30 ET (22:30 GMT)

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