Estate Planning Week
By: Martin M. Shenkman, CPA, MBA, PFS, JD
The third week of October 2009 has been declared as "estate planning week" to help motivate and encourage Americans to undertake the estate, financial, tax, savings, retirement and related planning they need to secure their futures and their family/loved ones well being. Following are some common questions and answers people are asking.
Question Do I save for my retirement or my kid's college education?
√ Assess your current situation and make a decision that fits your circumstances.
√ What options for college might you have that influence the decision? Is your child likely to qualify for a scholarship, financial aid or a loan? These might enable you to focus more on retirement savings.
√ What options might you have for retirement? Do you anticipate an inheritance that might fill the gap? Do you have the type of career, job or hobby that will enable you to work beyond the age many retire? Might you realistically relocate to a less costly area thereby lowering your retirement costs? These might enable you to focus more on college savings.
√ The younger you are the more weight can be placed on college. How old were you when you had your children?
Question When is the right time to tackle my will?
√ Now. There is no benefit for delay.
√ Now. If money is tight, get it done more inexpensively by cutting reasonable corners, not by not addressing it.
√ You need more than just a will. You need a power of attorney so someone can handle financial matters if you cannot. You need a living will and health proxy so someone can handle medical decisions if you cannot.
√ If you don't have a will state law will determine where your estate is distributed. This is rarely what anyone wants.
Question Will I ever be able to retire?
√ Don't answer or respond out of fear. Do the math, look at the details. If you focus on imponderables you won't make them happen. Instead focus on:
Focus on specific steps and making progress toward the goal. Reframe the question to: "What can I doe to make retirement more likely and more secure?"
√ Define "retirement?" Do you have to stop working at age 65? Is there a real reason? Remember, when the age 65 retirement first become commonly talked about life expectancy was much lower. How do you retire? You might be able to integrate a reduced work schedule, converting a hobby into a part time income and take other steps to redefine retirement to make it economically feasible. These steps might even make your post "retirement" years more rewarding and stimulating.
√ Do the math. Hire professionals to help guide you. What are the assumptions you are using to figure out when and how to retire? Often, some small steps early on can make a huge difference later. Saving a little more each year, being open minded to moving to a less costly region of the country, or scaling down to a less costly home, or just working a year or two more, is all it takes. Remember, working a couple more years means instead of spending down savings in those years, you're saving and compounding prior savings.
Question How can making hard decisions can actually make my life easier?
√ Human nature is to put off making a tough decision if you aren't forced to do it now. You might put off seeing a doctor about a pain in your arm for a while, but when it gets really painful you won't delay longer. The pain is the driver/motivator. But choosing not to write a will or sign a power of attorney won't cause any current pain. The only driver is the knowledge that your family and/or loved ones will suffer terribly financially, have potentially drawn out and difficult legal entanglements, and worse.
√ Putting off making important estate or financial decisions doesn't make the decisions easier, it usually makes them harder.
√ The longer you wait to make vital financial or legal decisions the fewer options you will have! If you don't sign a will, power of attorney or health proxy, and you suffer a stroke or accident, you may no longer have the competence to address these vital and personal matters. State law or a local court will determine your fate (perhaps by appointing a guardian), and the financial and legal treatment of your estate.
√ Confronting a tough financial or estate planning decision early makes it easier. If you buy needed life insurance while you are younger and healthier it will be cheaper (it may not even be available if you wait too long). If your retirement savings are inadequate, saving even a modest amount each month now on which earnings compound may make achieving your goals feasible. Waiting a few years to deal with it may make your goals impossible to achieve.
√ Delaying investing is one of the big reasons investors on average do much worse then the market. You should determine an optimal allocation and periodically have your wealth manager rebalance your portfolio towards that target allocation. It's also pretty common knowledge that many, perhaps most, individual investors buy high and sell low (not a typo). The rate of return on the United States stock market over the past 20 years was about 11.8 percent, while during the same time period the average stock mutual fund investors garnered only about a 4.5% rate of return. It might be tough to invest today, but if you wait for times to be comfortable, you'll be replicating the error most individual investors make.
Question How do I, the sandwich generation, prioritize between my parents and children?
√ Assess your current situation and make a decision that fits your circumstances.
√ What options for your parents might they have available that influence the decision? Are your parents likely to qualify for a government programs or aide? Do you have siblings or other family members that might help? Might your parents realistically relocate to a less costly area thereby lowering their living costs? What about moving in with you? These might enable you to focus more on saving for your children.
√ What options might you have for your children? Are there cost saving measures you can take? Scholarships? These might enable you to focus more on helping your parents?
√ The specific needs of each of your parents and children need to be weighed. What specific needs for each are you meeting? If there is a medical cost for either that will likely take priority over everything else. Try prioritizing and seeing the extent to which that will sole some of the decisions involved.
Question I have a young family. How can I be proactive by tackling a will?
√ If you don't name a guardian for your children. A court will choose who raises your children. Did that get your attention?
√ If you don't name a successor guardian for your children and the only guardian you name cannot serve, a court will have to choose who fills the void.
√ If you don't set up trust for minor children to manage their money the funds may end up in a court administered fund.
√ If you don't buy life insurance and your estate is modest, your children may have a horribly difficult time having a reasonable lifestyle.
√ If you love your family act to protect them.
Question What do I do I'm unprepared as I approach my Golden Years?
√ Be a Boy Scout! Remember the Motto "Be Prepared." If you don't prepare for your retirement no one else will do it for you.
√ Consult with a financial planner or CPA to jumpstart your planning. Getting a professional, knowledgeable and objective review may be the most important step to fast-tracking your planning (and getting realistic).
√ Perhaps you feel unprepared because your definition or time for retirement is unrealistic. Redefine "retirement?" Pick an age to retire that is realistic for your financial position. How do you retire? You might be able to integrate a reduced work schedule, converting a hobby into a part time income and take other steps to redefine retirement to make it economically feasible. These steps might even make your post "retirement" years more rewarding and stimulating.
√ Do the math. Start reducing expenses and increasing savings today. Remember that the 8th wonder of the world is "compounding".
Question What hard decisions must I make about marriage and money?
√ Communicate openly and involve both of you in all major decisions.
√ Both of you need to be comfortable with the decisions made. If either of you is not, discuss the different views and arrive at a reasonable compromise that works. If it proves difficult, involve an independent professional.
√ Remember if you become sick and disabled, or die, your spouse will likely be the person handling all of these matters. Not involving your spouse actively in all aspects of planning will make your disability more precarious financially, and potentially jeopardize the financial security of your spouse and loved ones if you die.
√ Get a prenuptial agreement or post-nuptial agreement to simplify the process of unwinding the relationship if it does not succeed.
Question Where should I save to ensure a solid financial ground?
√ Watch the insurance limits on your accounts. FDIC insurance covers all types of deposits received at an insured bank, including deposits in checking, NOW, and savings accounts, money market deposit accounts, and time deposits such as certificates of deposit (CDs). The basic insurance amount is $250,000 per depositor, per insured bank. The $250,000 amount applies to all depositors of an insured bank. Deposits in separate branches of an insured bank are not separately insured. Deposits in one insured bank are insured separately from deposits in another insured bank. Deposits maintained in different categories of legal ownership at the same bank can be separately insured. Therefore, it is possible to have deposits of more than $250,000 at one insured bank and still be fully insured. The $250,000 may be reduced in the future so be alert for changes.
√ There are other insurances and protections available. Inquire depending on the type of account you have. Securities Investor Protection Corporation, or SIPC provides protection for security accounts. There is also private insurance coverage on some accounts.
√ Avoid investment clutter. Too many accounts in too many institutions can undermine your estate and financial plan. Often accounts name beneficiaries or have co-owners so that these accounts are not distributed by your will on death. This can wreak havoc with the best plans. Too many accounts makes it difficult or impossible to monitor your investment asset allocation thereby undermining key financial planning.
Question How can I adjust your lifestyle to save more during these tough economic times?
√ Do a budget. Sounds boring. How do you loose weight? Eat less and exercise more. Boring but real! Forget the fancy programs and esoteric concepts. Figure out what you are spending money on and start finding places you can shave costs. Start with the least painful and move towards the more difficult. It's like when you were a kid and twisted your friends arm until she screamed "uncle." Cut away. Don't overlook little items. The small items add up.
√ Look for less costly options for common things you do. Take the long view, however. Deferring maintenance on your home heating system may cost much more in the long run.
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