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 | Jan 5, 2012 | Investing, Retirement
Just a quick post to let you know about some changes to contribution limits for the New Year. The amount you can contribute to your 401(k) is increasing by $500 in 2012. The new maximum is $17,000. Those over 50 can make an additional “catch up” contribution of of $5,500 for a total of $22,500.
IRA limits are staying the same: $5,000 plus an additional $1,000 for those over 50. Income limits on both Traditional and Roth IRAs are being increased, however, so more people will be able to take a tax deduction for Traditional IRA contributions or be eligible to make Roth contributions. Touch base with me if you have questions about your specific situation.
Enjoy the day! It’s going to be 60 degrees in Omaha today. Not bad for January.
Joe
by Joe Hearn | Jan 3, 2012 | Hobbies, Pursuits, Retirement
Happy New Year! As in years past, 2012 brings with it 365 new days. That’s 8,760 hours or 525,600 minutes. You’ll have 52 Saturdays, 52 Sundays, 10 Federal holidays and most likely several weeks of vacation and sick time. How will you spend all that time?
If you’re still working, you’ll spend about 2,086 hours on the job. That’s 86.9 days or just under 3 months. If you average 7 hours of sleep each night, you’ll spend about 3.5 months (2,555 hours) in bed. That leaves you with about 5.5 months to do everything else.
Unfortunately, those months won’t come in one big uninterrupted block. You’ll get a bit in the morning and a bit in the evening. You’ll have an extra day here and some time to yourself there. If you’re not careful, it will be easy to let it slip through your fingers.
To avoid that, I’d suggest that you make a time budget. In the same way that a financial budget can help you track spending and allocate your resources, a time budget can help you steward your time wisely. How to do it? Below is a basic outline to get you started:
2012 Time Budget
Income (time earned)
Hours 8,760
Expenses (time spent)
Work __________
Sleep __________
Life Maintenance
Cooking ___________
Eating ___________
Personal care ___________
Shopping ___________
Paying bills ___________
Commuting ___________
Housekeeping ___________
Household projects ___________
Other ___________
Entertainment/Leisure
Time with spouse ___________
Time with kids ___________
Time with friends ___________
Vacation ___________
Hobbies ___________
Television ___________
Reading ___________
Other ___________
Other
Volunteer work ___________
Church ___________
Other ___________
Total __________
Key Takeaways
I had 3 key takeaways after doing this exercise myself.
First, I discovered that outsourcing is my friend. If you’re like me, a lot of your day is eaten up by all the routine, but necessary little tasks that make your life run. Where possible, I have outsourced and simplified. Electronic bill pay has helped minimize the time I spend paying the bills each month. Hiring a lawn service has given me a few extra weekend hours. Wherever possible, simplify and outsource so you can focus on milestones and not maintenance.
Second, I discovered the importance of not just managing my time, but aligning it with my priorities. Time management can help you do things right (i.e. efficiently), but time alignment will help you actually do the right things.
It’s easy to get sidetracked and spend time on things that don’t get you any closer to your goals. For example, according to Nielsen, the average American watches 4-5 hours of television per day. Since that number includes weekends, most of us spend almost as much time in front of the T.V. each week as we do at work. By realigning that time with your priorities you can give yourself about 1,500 hours (or 2 months) per year to spend on things that matter. Avoid wasting and overspending time on things that aren’t important.
Finally, making a time budget helped me realize that all of my time is not created equally. The hours in my day are part oyster and part pearl. I spend most of my time on the mundane and a fraction of my day on the meaningful. For me it follows the 80/20 Rule, with about 20 percent of my time producing roughly 80 percent of my meaning and fulfillment. That means freeing up just a little time can make a big difference as long as I spend that time doing the right things. I’m sure the same is true for you. Make sure that your oyster is set up to produce pearls.
Thanks for reading. If you enjoyed this article scan the “Related Posts” section below for others like it.
Onward to an amazing 2012!
Joe
by Joe Hearn | Dec 28, 2011 | Investing, Retirement
Most New Year’s resolutions relate to either fitness or finances. I’m not a real authority on fitness, but I do have a few thoughts on finances. Below are 10 ideas to make sure your retirement planning is on track for the New Year.
1. Automate your saving—Make sure you stick to your savings goals by having money deducted each month from your paycheck or checking account.
2. Increase your contributions—Getting a raise in 2012? Rather than spending it, commit to setting it aside for retirement. Those over 50 can contribute $22,500 to a 401(k) and $6,000 to an IRA in 2012.
3. Create a debt payoff plan—Set a goal to enter retirement debt free. Read this article for help in putting together a plan.
4. Schedule an annual review with your financial adviser—Review how your investments performed and whether or not any changes or rebalancing are in order.
5. Talk with your spouse about retirement—Make sure you’re on the same page with your spouse about retirement. Here are 10 questions to get the conversation started.
6. Test drive your retirement budget—Want to know if your retirement budget is realistic? Try living on it for six months and then use what you learn to refine and improve your plan.
7. Take a mini-retirement—A mini-retirement is longer than a vacation, but shorter than, well, retirement. It’s a great way to learn more about a place or an activity that you are considering for retirement.
8. If close to retirement, set aside one year of retirement expenses in cash—A major risk in the early years of retirement is that you will begin withdrawing money at a time when your investments are performing poorly. Avoid this sequence risk by having a year of withdrawals set aside in cash.
9. Check your insurance coverage—As you age and the kids move out, your insurance needs change. You may want to consider adding a long-term care policy or making changes to your other insurance coverage.
10. Update your estate plan—Everyone needs an estate plan that is current and clearly spells out their wishes. Meet with a trusted adviser to get your affairs in order.
Hopefully a few of those ideas struck a chord with you. If you’d like more information on planning for the New Year, be sure to read this.
Thanks for reading. Touch base if I can ever help.
Joe
by Joe Hearn | Dec 20, 2011 | Investing, Retirement, Risk
So far during 2011, the Dow Jones Industrial Average has had moves of 100 points or more on 97 trading days. That’s 23 more than during all of 2010 and the year isn’t even over yet. With so much volatility and uncertainty, it would be easy to panic and make decisions you’ll later regret. Unfortunately, your mind isn’t always wired to help. In fact, it can actively work against you. Below are seven cognitive biases that could cause you to make bad investment or retirement planning decisions, as well as suggestions for overcoming them.
Attention bias
This is the tendency for emotionally dominant stimuli to monopolize our attention. CNBC, I’m looking at you. Spending too much time watching the ups and downs in the market is likely to fray your nerves and cause you to sell low and buy high. Remember the words of Warren Buffett: “The market exists to serve you, not instruct you.”
Bandwagon effect
This one is pretty self explanatory and was the primary driver in such spectacular failures as the internet, telecommunication and housing bubbles. When trades get completely one-sided (gold?), it’s time to ask yourself if you’re just buying or selling because that’s what everyone else is doing.
Action bias
In times of stress or danger, it sometimes makes us feel better to act, even if it would be better for us to sit on our hands. A great example I heard of this recently relates to soccer. During a penalty kick the ball is kicked to the center of the net 30 percent of the time, but the goalie only stays put 6 percent of the time because he doesn’t want to look like he’s not trying. Sometimes the best thing you can do is nothing.
Recency bias
This is our tendency to give more weight to recent events than past events. The 2008 global financial meltdown is still pretty fresh in everyone’s mind. Eager to avoid a repeat, many are ready to move to the sidelines at a moments notice. Keep in mind, though, that during the lifetime of the baby-boomers, the S&P 500 has gone from about 17 to 1,250. That’s 73 times higher now than when the first baby-boomer was born. Don’t let the emotion of recent headlines completely overshadow the historical record.
Hyperbolic discounting
This is our tendency for immediate gratification at the expense of the future. In a nutshell, Current You doesn’t care much for Future You. Current You wants to stop making 401(k) contributions and put the money under the mattress so he can sleep better at night. Future You needs that money saved and invested so he can afford to retire. If you want Future You to be happy, you need to convince Current You to make some decisions that are uncomfortable.
Negativity bias
This is our tendency to give greater weight to negative information over positive. Yes, there are a lot of things wrong with the world, but there is a lot that is right. Pick any vintage from the wine cellar of history and you’re likely to find some sort of man-made or natural disaster. And yet, the economic and technological progress we’ve made over the last many decades is amazing. Admittedly, it sometimes feels like a yo-yo, but if you step back you can see that the general progression has been up and to the right.
Illusion of control
Finally, we arrive at our tendency to assume that we have more control over events than we actually do. None of us can control the debt crisis in Europe, but we can control our personal debt. We have little influence over Washington’s spending, but we can make sure our own budgets are in order. Few of us have the ear of the Social Security commissioner, but all of us can make sure that our own retirement investments are allocated properly and that we have a logical distribution strategy. In short, focus on those things you can control.
Will Rogers once said “It’s not what you don’t know that hurts you. It’s what you know that isn’t so.” The way our brains are wired, as well as the ups and downs in the markets during the last few years, have caused many to make regrettable decisions based on “what they know that isn’t so.” Hopefully understanding your brain’s natural tendencies can help you make better long-term decisions that result in a secure, meaningful retirement.
Thanks for reading. If you enjoyed this article, scan the “Related Posts” section below for others like it.
Joe
by Joe Hearn | Dec 16, 2011 | Income, Investing, Retirement
“You’re going to die in 48 hours.” If a doctor gave you that diagnosis, would your plans change for the next two days? Absolutely, right? You would be racing around like a madman (or woman) saying goodbye to family and friends and tying up as many loose ends as possible.
Now imagine that the diagnosis changed from 48 hours to 48 years. My guess is that your sense of urgency just evaporated. No need to rush. There’s plenty of time to live life, spend time with family and work through your “To do” list. That’s because for most things, time and urgency or inversely correlated. That’s just a fancy way of saying that a whole lot of time equals not much urgency and vice versa.
That equation is true in sports, life, deadlines at the office and just about everything else you can think of. Where it doesn’t always hold true, however, is with your money, where less time often translates into less urgency. Given 48 hours to live, I’m guessing money would be the last thing on your mind. You certainly wouldn’t swing by the HR department and increase your monthly 401(k) contributions. But that is exactly the kind of response you should have after learning that you have 48 years to live. The more time you have (i.e. the longer your life expectancy), the more money you will need and the more urgent it becomes to be saving as much as possible. So if you plan on living for awhile, hurry up! You have a lot of time and there isn’t a minute to waste.
A few practical applications:
- Automate your savings in 2012 by having money automatically taken from your paycheck or checking account each month.
- Calculate what you saved this year and increase it by 1% next year. If possible, do the same every year after.
- If older than 50, take advantage of the catch-up contributions allowed on your 401(k) and IRA.
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