by Joe Hearn | May 8, 2012 | Estate Planning, Insurance, Investing, Retirement
The odds are extremely good that my wife will outlive me. Whatever the reason—genetics, a healthier diet, the fact that she uses our treadmill as something other than a clothes rack—there will likely come a day when she bids me adieu.
Most people know that women have a longer life expectancy than men, living about 81 years compared to 76 for the average male. But what they may not have considered is what this statistic means in reality: namely that the overwhelming majority of people in retirement are women.
In the U.S., women make up nearly 60 percent of the population over age 65 and nearly 70 percent of the population of those over age 85*. How should that reality affect the retirement planning of the fairer sex?
Investments
At a minimum, a longer retirement means the need for more income. All else being equal, funding a 20-year retirement will be more expensive than funding a 10-year retirement. That means more money will need to be set aside leading up to retirement and withdrawal rates will need to be sustainable (around 4 percent) during retirement in order to keep from running out of money.
Also, asset allocation will be more important than ever. The portfolio will need to be invested aggressively enough to overcome the ravaging effects of inflation that are sure to happen over a longer period, but not so aggressively that investment losses wipe out principal. Maintaining the proper balance is a key ingredient to making the money last.
Pension plans
A pension plan for a married couple can be an important source of retirement income, but what happens to that income when one of the spouses dies? If the husband dies and it was his pension, does that income go away? It depends. If the pension benefit was based on his life only, then payments will likely end when he dies. To avoid the negative financial impact that this would likely cause, couples should arrange with the pension provider to base the benefits on both of their lives. “Joint Life” benefits will likely be smaller than those based on a single life, but they will also minimize the financial impact on the surviving spouse.
Social Security
Women are more likely than men to leave the workforce at some point in their careers in order to raise children or care for aging parents. Some choose not to work outside the home at all. This, along with the fact that women still tend to earn less than their male counterparts, can impact their eligibility for Social Security benefits. Because of that, the Social Security Administration has special rules that apply to people who are widowed, divorced or still married, but with little in the way of earned benefits.
For starters, spousal benefits entitle everyone to either their own benefit or half of their spouse’s benefit, whichever is greater. In addition, those widowed or divorced are able to collect benefits on their former spouse’s Social Security record if:
- The former spouse is collecting benefits or is deceased
- You were married for at least 10 years
- You are 62 or older (60 or older if your spouse is deceased)
Getting remarried could affect your eligibility for benefits under certain conditions, so be sure to check with the Social Security Administration before heading back to the altar. For more information visit www.ssa.gov and download the brochure “What Every Woman Should Know.”
Life Insurance
The primary purpose of life insurance is to replace a person’s income in the event of his or her death (Note: It can also be an effective estate planning tool, but that is a discussion for another article). Because of that, many people keep adequate insurance coverage during their working years to protect their spouse and children, but then get rid of it when they retire. This could be a big mistake if a significant portion of a couple’s retirement income is attributable to just one of the spouses, say in the form of pension or Social Security benefits.
How do you know if you need life insurance during retirement? Ask yourself this question: “Would my death create a significant financial hardship for my spouse?” If not, then you probably don’t need life insurance. However, if the death of either you or your spouse would result in significant loss of income for the other, then life insurance can be a good way to protect against that loss.
Long-term care insurance
Long-term care insurance can help cover a variety of costs including home health care, respite care, adult day care, care in an assisted living facility, or nursing home care. This type of insurance can make sense for women for a variety of reasons, but two stand out. First, if a woman is predeceased by her husband, there is a good chance that there will be some large medical bills related to his final illness and care. These bills can take a big chunk out a couple’s nest egg and impair its ability to provide income to the surviving spouse. Long-term care insurance can help preserve those assets by covering expenses not usually covered by health insurance, Medicare or Medicaid.
Second, if a woman lives 5, 10 or even 20 years longer than her husband, there is a good chance that she will need some type of long-term care services during her life as well. And because her husband died first, she will have fewer options if she becomes sick or disabled and needs someone to help. A long-term care policy can provide peace of mind, minimize burden on friends or family, and help her get into her choice of facilities or be cared for at home as long as possible.
Estate Planning
Married couples typically create their estate plan (e.g. wills, powers of attorney, etc.) together, but it is the wife who tends to see that plan in action. Because women live longer, it is the wife who will likely be the one to use the powers of attorney for finance and health care if her husband becomes disabled or incapacitated due to illness. She will also need to handle his estate when he dies. When that occurs she will need to update her own planning and make sure that it passes her property to the correct people and names the people she wants to handle her affairs in the event that she is no longer able. Because of that, women should pay particular attention to their family’s estate planning and make sure that it is up to date and accurately reflects their wishes.
Living a long, healthy life definitely has its benefits. It means more time with friends and family. More time doing the things you love. More time enjoying life and experiencing all that it has to offer. Unfortunately, it can also mean outliving those you love. By planning ahead, you can create security and peace of mind for yourself and your family and keep your retirement on track.
Photo by Mark Brooks. Used under Creative Commons License. I originally published this article at www.fpanet.org.
by Joe Hearn | Jan 10, 2012 | Estate Planning, Retirement
Does your retirement plan include your parents? It probably should. Chances are good that they are counting on you to handle their affairs if they die or become incapacitated. How confident are you that you have everything you need to handle that role effectively? Do you know their wishes regarding life-prolonging care? Have they given you power of attorney? Will they have adequate resources to pay for the cost of their care?
Many parents are reluctant to discuss these things with their children because they think they are private matters, they fear losing control, or they want to appear to have it all together. Be sensitive to that, but don’t let it keep you from starting the conversation because the stakes are high.
A recent study by MetLife found that there are nearly 10 million adults over age 50 caring for their aging parents. The study estimates the potential costs for caregivers (in terms of lost wages, pension and Social Security benefits) to be around $3 trillion or an average of $300,000 per caregiver. Many risk putting a significant dent in their own retirement plans if they haven’t properly planned for how to help mom and dad.
The sooner you begin talking and planning, the easier it will likely be on everyone involved. Helping is much more difficult after a crisis, so start talking while your parents are still healthy and active. Here are five steps to cover as you work through the process.
Dialogue
An easy way to begin the conversation is to talk to your parents about the planning you have done for yourself. Be transparent about areas like your finances and legal affairs and ask their opinion on your situation. Then ask them about their planning and what role you might play in helping them as they age.
Be sure to communicate that any involvement on your part would be gradual and based on their needs. You aren’t looking to take control of their affairs, but simply want to understand their situation so you can be an effective advocate for them if they ever need your help. Make clear that you are just the understudy and you won’t step in to help unless or until they need you.
Review
Once everyone is talking, it’s time to review your parents’ current state of affairs. What are their current assets and liabilities? What accounts do they have at different banks or investment firms? Who are their key financial and legal advisers? Do they have a will and powers of attorney? Do those documents reflect their current wishes? Where do they keep important documents? How is their health? What doctors do they see and what medications do they take? Do they have long-term care insurance? By asking these and other questions, you will get a broad overview of their affairs and be in a better position to not only offer assistance, but also spot potential problems.
Remedy
If the Review stage uncovered any holes in your parents’ planning, now is the time to fix them. Pay particular attention to five key areas: 1) Finances, 2) Insurance, 3) Legal documents, 4) Living arrangements and 5) Health. Work with your parents and their advisers to make sure that all bases are covered. Here is a simple checklist of key points to consider for each area:
Finances
- Make a list of all accounts and where they are held
- Get contact information for their advisers
- Consolidate and simplify accounts where possible
- Make sure the accounts are titled correctly
- Offer to sit in on a meeting with their financial adviser to review investments, make sure the asset allocation is appropriate and make sure there are adequate resources to support your parents’ lifestyle
- Review Social Security benefits
- Make sure all beneficiary designations are up to date
- Streamline bill paying
Insurance
- Make a list of all insurance policies (life, health, long-term care, etc.) and where they are located
- Get contact information for their insurance advisers
- Offer to sit in on a meeting with their insurance adviser to see if a long-term care insurance policy would be appropriate
- Review homeowners, auto and umbrella liability insurance to make sure they are adequate, appropriate and up-to-date.
- Review health insurance coverage and consider whether it would be appropriate to add a Medigap policy to pay for costs not covered by Medicare
Legal Documents
- Do they have a will or estate plan?
- If so, does it reflect their current wishes (i.e. does it pass property to the correct people and have the correct people taking charge)?
- Do they have an up-to-date durable power of attorney for finance?
- Do they have an up-to-date durable power of attorney for health care?
- Does their health care power of attorney contain a health care directive that spells out their wishes for life-prolonging care?
Living arrangements
- Is the current housing situation suitable?
- Do any changes, updates or modifications need to be made to the house?
- Have they made contingency plans for illness, disability or death of a spouse?
- Is there money available to pay for those contingencies (e.g. savings or long-term care insurance)?
Health
- Make a list of their doctors as well as any medications they are taking
- Help coordinate benefits between care providers and insurance companies
Organize
Once the initial planning is done, get it organized. People usually need important documents during painful or stressful times. A will is needed after someone dies. A medical power of attorney is needed after someone has become incapacitated. Having everything organized will not only minimize stress, but it will also help those in charge to make informed decisions during difficult circumstances.
Implement
Helping a parent is typically a gradual process. Once the initial planning is done, keep the lines of communication open. If they need help in a certain area or with a particular task, you will be there to lend a hand. As they need more help, you can gradually implement the planning that you did with them previously.
Becoming a parent to your parent is never easy, but you owe it to both them and yourself to get things in order. Proper planning will give peace of mind, help avoid family conflict and minimize the financial impact on everyone involved.
Thanks for reading. Touch base if I can ever help.
Joe
Note: I originally published this article at www.fpanet.org.
by Joe Hearn | Oct 31, 2011 | Estate Planning, Income, Retirement
I spent a lot of time traveling in October, which was good for my tan, but bad for my writing schedule. There’s quite a bit on the editorial calendar for November though, so stay tuned. In the meantime, below is a list of articles published at Intentional Retirement during October.
Thanks for reading!
Joe
by Joe Hearn | Oct 21, 2011 | Estate Planning
October 17-23 is officially National Estate Planning Awareness Week. As in years past, my procrastination got the better of me and I didn’t get you a gift, so I’m sending out this handy little estate planning primer instead. Enjoy.
What is estate planning?
It’s pretty simple really. Someday we’re all going to die. Our estate plan spells out things like how we want our property distributed, who we want to take care of our minor children, and who we want to handle our affairs. It also spells out who we want to make medical and financial decisions for us if we become incapacitated.
Who needs an estate plan?
Short answer: You. Regardless of how much or little you have, you should have a plan for both death and incapacity.
How do I go about setting up a plan?
Estate planning laws are complex, always changing, and often very rigid. As unpleasant as it can sometimes be, you need to work within that complex framework if you want to accomplish your goals. Working with your financial adviser and a competent estate planning attorney will ensure that you have a plan that not only accomplishes your wishes, but saves you time, frustration, and a lot of money.
What should a good estate plan accomplish?
A good estate plan should accomplish three things: It should pass your property to the correct people, designate the correct people to take charge, and minimizes expense, hassle and taxes.
What are the key estate planning documents?
Most estate plans have a will, living trust, durable power of attorney for finance, durable power of attorney for health care, advanced medical directives, and a letter of instruction.
What is a will?
A will is simply a legal document with formal signing requirements which spells out your intentions for the division and distribution of your property to heirs at death. If you die without a will (also known as intestacy), the laws of your state of residence, or the laws of the states in which you own real estate, may control who inherits your property. You need a will even if your assets are owned in joint tenancy, a revocable living trust, or in a manner where you designated a beneficiary (e.g. life insurance) to guard against intestacy for property titled in your own name or in the event your joint tenant or beneficiary dies before you do.
What is a revocable living trust?
A living trust is a legal entity that owns your assets. You typically act as trustee of those assets during your life and then name someone to take over for you after you die. Your trust document gives instructions for how you want your property handled and distributed after death. A living trust is often used as a will substitute because it avoids the costly and time consuming process of probate. You will typically title your assets in the name of your trust while alive and also have a “pour over will” that will transfer any assets not properly titled into the trust after you die.
What is a durable power of attorney for finance?
A durable power of attorney for finance is a simple and inexpensive legal document that authorizes a person you have chosen to step in and manage your day-to-day financial decisions if you become incapacitated. Everyone needs this document to provide for the ongoing management of their financial affairs if they cannot make decisions for themselves.
What is a durable power of attorney for health care?
Similar to the power of attorney for finance, the health care power of attorney is a legal document that authorizes a person you have chosen to step in and make health care decisions for you if you become incapacitated and can no longer speak for yourself.
What is an advanced medical directive?
An advanced medical directive (sometimes called a living will) provides written instructions to your agent that communicate your wishes regarding the withholding or withdrawal of certain life support equipment or medical procedures. Without these instructions, medical providers are typically required to use artificial means like life support to prolong your life.
What is a letter of instruction?
A letter of instruction is a non-legal document that you can choose to include with your planning to give any personal thoughts, feelings or directions to your heirs. It can include things like burial wishes or even final words of wisdom and encouragement. Unlike the will, the letter of instruction remains private. Keep in mind, however, that anything in the letter is not legally binding.
As always, thanks for reading! Touch base if I can ever help.
Joe
by Joe Hearn | Sep 13, 2011 | Estate Planning, Insurance, Retirement
Quick Summary: Key documents everyone needs to successfully navigate retirement.
When planning for retirement, most people focus on saving, and rightly so. Having enough money to fund your retirement dreams is a key element to any plan. Often overlooked, however, is the importance of obtaining and organizing important documents. Here are ten essential documents you will need to successfully navigate retirement.
Pension paperwork
Defined benefit pensions have become less common over the years, but there are still many people covered by them. If you have a pension at work, the details of the plan will be spelled out in the plan’s Summary Plan Description. In addition, you should receive an Individual Benefit Statement that details the specific benefits that you have earned and are eligible for. Make sure to review those documents as you approach retirement so that both you and your spouse have a good understanding of how much income you can expect from the plan and what will happen to that income if the primary pension holder dies. Make sure to contact your employee benefit’s department with questions or concerns. Also, the Department of Health and Human Services offers help and advice to pension holders through its Pension Counseling and Information Program. Visit www.aoa.gov for more information.
Beneficiary designation forms
Many accounts, such as Individual Retirement Accounts (IRAs), 401(k)s, annuities, and insurance policies allow you to name a beneficiary who will receive those assets when you die. Many people don’t realize that those designations take precedence over their will, even if the will is more accurate and up to date. Because of this, it is important to review the beneficiary designations on all your accounts (as well as those of your aging parents if you are helping them with their finances) prior to retiring to make sure that they accurately reflect your wishes. Meet with your financial adviser and estate planning attorney to ensure that your designations not only pass property to the correct people, but also minimize expense and taxes.
Documents needed when applying for Social Security
The Social Security Administration will need you to provide certain documents when filing for retirement or survivor benefits. Documents they may request include your Social Security card, a certified copy of your birth certificate, proof of citizenship if you were not born in the U.S., military discharge papers, a copy of your marriage license or divorce papers, and a copy of your W-2 form (or self-employment tax return) for last year. Having these documents readily available will help speed the process along.
Investment paperwork
Most people’s assets are divided into many different types of accounts. Some may be tax-deferred, others may not. Some might have restrictions or requirements on withdrawals. Some, like annuities, might give you different options for turning the account into a guaranteed income stream. When transitioning into retirement, it is important to have current copies of your account statements as well as options or restrictions associated with each account so you can craft a distribution strategy that meets your needs while minimizing expense, hassle and taxes.
Health care paperwork
Your health benefits during retirement will likely come from multiple sources. Those could include a former employer, Medicare, Medicaid, a Medicare supplement policy, or a long-term care policy. Be sure to retain benefit summaries, contact information, and policies associated with each. If you have not filed for Social Security benefits by age 65, you will need to apply for Medicare. You can do this up to three months prior to your 65th birthday. When applying, you will likely need to provide them with the same documents mentioned earlier for Social Security applicants.
Home inventory
Many house fires or burglaries occur when the homeowner is away. When you retire, you will likely spend more time traveling or at a second home than you did during your working years. Because of that, it is important to inventory the contents of your home (either make a list or do a quick video walk through) so that you can more easily make insurance claims and rebuild your life if the unexpected happens.
Insurance policies
Many retirees have life insurance policies in order to replace income in the event of a death, as a vehicle to build cash value, or for estate planning purposes. Make sure to have current copies of your policies as well as contact information for the insurance company so you can easily access cash value during life or so that your heirs can easily claim benefits if something happens to you.
Will/Trust
Most people need a will, regardless of the size of their estate, to control the passing of property at death. Another tool to accomplish this while at the same time avoiding probate is a Revocable Living Trust. As you enter retirement, you should meet with your attorney to put a plan in place that passes your property to the correct people, designates the correct people to take charge, and minimizes expense, hassle and taxes.
Durable power of attorney for finance and health care
A durable power of attorney for finance is a simple and inexpensive legal document that authorizes a person you have chosen to step in and manage your day-to-day financial decisions if you become incapacitated. Everyone needs this document to provide for the ongoing management of their financial affairs if they cannot make decisions for themselves.
Similar to the power of attorney for finance, the health care power of attorney is a legal document that authorizes a person you have chosen to step in and make health care decisions for you if you become incapacitated and can no longer speak for yourself. You can also include a health care directive which provides written instructions to your agent that communicate your wishes regarding the withholding or withdrawal of certain life support equipment or medical procedures.
If you plan on moving to a different state when you retire, meet with your attorney to make sure that your will, trust, and powers of attorney will be valid in your new state of residence and make any necessary revisions.
Tax returns
In many ways life becomes easier after you retire. Unfortunately, this is not the case with your taxes. In fact, because your employer is no longer automatically withholding from your paycheck, tracking and paying your taxes may become more complicated. To make matters worse, different states tax income and spending differently. Will you owe tax on Social Security? How about pension and annuity income? How much should you withhold from IRA distributions? The short answer is “It depends.”
Because of this you should work closely with a trusted tax adviser and then maintain your tax returns and supporting documents for seven years. The IRS can look back three years for basic errors and six if you underestimated income by more than 25 percent.
As you can see, obtaining, understanding, and organizing your key documents will not only help you to make informed decisions, but will also facilitate a smooth transition into a rewarding and meaningful retirement.
As always, thanks for reading! Can you do me a quick favor? Help me spread the ideas at Intentional Retirement by forwarding this email to a friend or family member who you think would benefit from it.
Joe
by Joe Hearn | May 18, 2011 | Asset Allocation, Distribution Planning, Estate Planning, Insurance, Investing, Retirement, Risk
Retirement has a lot of moving parts and when you consider that it could last for thirty years or more, it should come as no surprise that it will have several distinct phases. Sixty-five will look different from seventy-five, which will look different than eighty-five. The world, your health, your finances, your responsibilities, and your priorities, will be dynamic and ever changing. Because of that, it’s important to review your planning and circumstances each year and make whatever course corrections are necessary to keep you on track. Below is a list of questions to ask yourself each year to help determine if any changes or adjustments are in order.
1) Is my withdrawal rate sustainable? The answer to that question depends on many things, including investment performance, inflation, how long you live, and, not surprisingly, luck. Running out of money is not a pleasant option, so you should periodically evaluate your distribution strategy to see if it is sustainable. A good rule of thumb is to keep withdrawals at 4 percent or less of your overall portfolio. Everyone’s circumstances are different, however, so meet with your adviser to make sure your income lasts.
2) Is my income still sufficient and keeping pace with inflation? Inflation is constantly eroding the purchasing power of your money. That means you will likely need to pay yourself more and more with each passing year simply to buy the very same goods and services. Consider a day in the hospital. In 1980 it cost $340. That same day in 2010 cost $5,310. To offset the impacts of inflation, most people need to continue to grow their portfolio, even after retiring. That means you can’t shun risk altogether. You’ll likely need a well-diversified portfolio of stocks and bonds in order to keep pace. That leads us to number three.
3) Is my asset allocation appropriate? Simply put, asset allocation is the process of spreading your investments among stocks, bonds, cash, real estate, commodities, and foreign securities. Research shows that asset allocation is extremely important. Not only does it help to minimize risk, but studies show that it is responsible for nearly 90 percent of your overall return. As markets fluctuate you will likely need to rebalance your portfolio to get your allocation back to your intended target. In the same way, if your goals and objectives change, you should adjust your allocation to match.
4) Is the amount of risk I’m taking still appropriate? Too often people discover their tolerance for risk only after they have exceeded it. This can be a painful lesson any time, but it is devastating to someone in retirement. This is easy to see when you consider the arithmetic of loss. Any investment loss you experience requires a considerably larger gain just to get back to even. For example, if your portfolio loses 50 percent, you would need a 100 percent return just to get back to where you started. Most people in retirement don’t have the luxury of waiting around for 100 percent returns. Better to avoid the loss in the first place.
5) Has the value of my assets changed significantly? Once you retire, you need to turn your assets into an income stream. The bigger the asset, the bigger the potential income stream. Big swings in net worth, like a large inheritance or a significant market loss, affect the amount of income your portfolio can generate. You don’t want to run out of money by taking too much or live miserly by taking too little. Any time the value of your assets changes significantly, reevaluate your withdrawal rate and your asset allocation to make sure they are still appropriate.
6) Are my beneficiary designations up to date? You might not realize that your beneficiary designations (like those on your IRA, 401(k), and life insurance policies) override your will. If your will leaves your life insurance to your kids, but you never updated the beneficiary designation on the insurance policy after your divorce, your ex is getting the money. As you can see, it’s important to periodically check your beneficiary designations to make sure that they reflect your current intentions.
7) Have any of my sources of income been impacted? Personal savings is only one source of income during retirement. You will likely also receive Social Security and possibly a pension. If your spouse dies, that might cause the pension to go away or be reduced. Worse, if the company you worked for goes bankrupt, your pension might get taken over by the Pension Benefit Guarantee Corporation and be significantly reduced. Social Security is on an unsustainable path and your benefits there might be altered as well. Any changes to these other sources of income will put more of the burden on your personal savings, so monitor them closely.
8) Has mine or my spouse’s health changed significantly? At some point, the desire to live close to the beach might give way to the desire to live close to a good medical facility. As you age, investigate assisted living areas and medical facilities in your area. You might eventually need to sell your home to move into a facility or even move to another state if you want to be closer to friends or family that will be involved in your care. Do as much of this planning as possible while you are still healthy so you can easily transition into the next phase.
9) Is my estate plan up to date? Your estate plan should not be a static document. As your life changes, your planning must change with it. Getting married or divorced would likely significantly change how you want to distribute your property. Likewise if there is a death in the family. Each year you should review your documents, including your will, trust, and powers of attorney to make sure that they still reflect your wishes and still have the correct people taking charge if you were to die or become incapacitated. Also, if you move to another state when you retire, meet with your attorney to make sure that your documents will be valid in your new state of residence. Make revisions as necessary.
10) Have my insurance needs changed? Not surprisingly, your insurance needs will change over time. It’s a good idea to periodically review your policies and make changes as necessary. Is Medicare adequate or do you need additional coverage to fill certain health care gaps? Do you anticipate that you or your spouse will need assistance with basic daily activities? If so, you might want to consider a long-term care policy. Does your pension go away when you die? Will your death burden your heirs with a large estate tax bill? If so, changes to your life insurance may be in order.
For a handy PDF of this document, visit the Resources page.
