Can you live off your savings if you can't work for months?

While we might try to plan for the future, life has a way of throwing us curveballs. From a sudden onset of chronic sickness to an unexpected injury, if you find yourself unable to work and can’t earn an income, it can cause great financial strain as you struggle to live off your savings. 

According to recent study by The University of Melbourne, more than half of Australians are only just making ends meet, which poses the question: how long could you live off your savings?

Discover ways to plan for the unexpected and why an income protection insurance policy may be a financial safety net. 

Income protection insurance 101: how does income protection work?

As the name suggests, income protection insurance pays a regular income (known as a benefit amount) if you’re unable to work for an extended period of time (subject to eligibility), usually as monthly payments.

As certified financial planner Sheila Cabacungan explains, “Most of us use our skills, time and energy to generate the income we need to sustain life. Put simply, we have to work to earn and earn to live.”

“Unlike life insurance, which is a lump of money paid to our dependants when we die, income protection is paid as a stream of income on a regular basis so we can use the money to live on,” Sheila says. “It pays this income which is generally a percentage of our wages and salary until we are back at work or until the policy expires."

Here’s somethings that you should know about income protection insurance: 

• Cover: Are you wondering how much income protection you need? As an example, Real Income Protection Insurance covers up to 70% of your pre-tax income, up to $15,000 each month. For example, if you earn $6,000 per month and you’re unable to work, a Real Income Protection Insurance policy could pay you up to $4,200 per month (after your selected waiting period) until you’re back on your feet, or until the policy expires.
• Tax deductible: Income protection insurance premiums are generally tax deductible, so you may be able to claim your premiums on your personal tax return. On the flip side, you may also have to declare any monthly benefits you receive as an income, should you fall sick or get injured and make claims. However, be sure to seek the advice of a professional to assess your unique situation.
• Income protection benefit period: When you apply for a policy, you can choose a benefit period. For example, with Real Income Protection Insurance, this could be anything from six months, one year, two years, or five years. This means that you’ll be paid the monthly benefit amount up to your nominated period, depending on how long you’re unable to work due to sickness or injury (subject to eligibility).
• Waiting period: Most income protection insurance policies generally come with waiting periods, which is the time between when you become unable to work and when the insurance starts paying out. For example, Real Income Protection insurance offers a choice of either a 30-day or 90-day waiting period before you can start receiving benefits for an eligible claim.
• Premiums: The cost of premiums varies depending on factors such as your age, gender, occupation, smoker status, health, benefit amount, and waiting period. Premiums can be paid monthly or annually (depending on the provider).
• Exclusions: Income protection insurance can have specific exclusions that vary depending on the provider. These may relate to pre-existing medical conditions you had before taking out the policy, or even risky activities that you engage in, for example if the injury was sustained from dangerous (or illegal) activities or sports. So, it’s always best to read the exclusions in the Product Disclosure Statement (PDS) to help you decide if the policy is right for you. 

What are some considerations of income protection insurance?

At a time when cost of living pressures is making it harder to save, some Australians don’t have an emergency fund to fall back on. The University of Melbourne found that 9% of Australians wouldn’t be able to cover an emergency expense and a further 5% would work extra hours to try to cover the expense, and 9% would borrow from the bank, while another 8% would turn to family, friends or the government for help.

As Sheila says: “I have a client who has been on Income Protection benefits for five years with end-stage kidney failure. When he was in his early 20s, young, fit, healthy, and just married, he took out an income protection policy and at 49 was diagnosed with kidney failure.” 

“Income protection insurance allowed him and his family to focus on his health and wellbeing without the financial burden of losing his salary. The financial weight of managing his medical condition has been met by a replacement income,” Sheila adds.

Few things you may want to consider, if wondering whether income protection insurance is right for you:

• Your income may continue even if you can’t work: If you find your life unexpectedly turned upside down by a significant health issue or injury, you may continue to receive up to a certain percentage of your regular income, up to a certain amount even though you can’t work.
• You may maintain your lifestyle: Income protection insurance may mean that a serious sickness or injury doesn’t cause you much additional financial strain or unwanted debt.
• You may customise your policy: Most income protection policies can be adjusted to your individual circumstances. For instance, you may choose to pay a higher premium for a shorter waiting period or opt to reduce your premium by extending this waiting period.

Crunch the numbers: Could I live off my savings? 

You may consider these two factors when determining whether you can sustain yourself solely on your savings for an extended period. 

“First off, the discipline of knowing what you need to live on and what you can do without is important,” says Sheila. “Secondly, the discipline to regularly set aside a portion of your income to cover the ‘just in case’ events will determine the pot of cash you have to survive when your regular income stops.”

As a result, the answer to ‘How long could you live off your savings?’ is one that depends largely on your unique circumstances. As a general guide, it may be a good idea to build an emergency fund for at least three months of your normal living expenses. 

You can use online tools like MoneySmart’s Budget Planner to work out where your money is going and create a budget personalised to your own financial situation. 

“Keep an inventory of things you can sell to raise cash quickly on places like Facebook Marketplace or Gum Tree. Play the ‘what if’ game with yourself and your partner,” suggests Sheila. 

“Talk and think through what you would do if one of you lost your jobs or got chronically sick or had an accident; who could you rely on for short- or long-term financial support, and how would you adjust your current spending patterns?”

Tips to boost your savings or rainy-day fund

When it comes to boosting your savings balance, Sheila offers the following tips:

1. Build up an emergency fund that covers at least three months of your living expenses. 
2. Work to a budget and keep track of your spending so that when unexpected events happen, you can react and cut back on what isn’t necessary. 
3. Separate your emergency fund into a separate bank account and set up automated bank transfers directly after you’ve been paid to ensure you keep this savings balance growing.
4. Boost your employability and invest in your ongoing professional education in your chosen field of work.
5. Turn your hobbies into a side hustle, or at least see how you can monetise what you enjoy doing. 

Keep Reading: Discover how to make some extra money this month with these practical side hustle tips and tricks. 

Consider protection 

While you may look into having three months of living expenses ready in an emergency savings account, it may be a struggle to reach this goal in the wake of rising cost of living pressures.

So, you may want to consider protecting a part of your income, especially if you rely on it to cover your cost of living. Income protection insurance may provide a replacement (up to a certain % of your income and total amount) for your income in the form of monthly benefits. This may help you to meet your day-to-day expenses and maintain your lifestyle, while recovering from your sickness or injury.

Want to learn more about Real Income Protection Insurance? Request a quote online today.