Retirement And Estate Planning: What You Need To Know
As you approach retirement, there is a lot to consider – especially as it relates to your finances, health and family. Undoubtedly, your financial needs, life expectancy, goals and risk tolerance will need to be carefully reviewed since you will likely rely on whatever you have accumulated for retirement to partially or completely sustain the lifestyle that you have come to expect. Relatedly, estate planning involves arranging for the administration and distribution of your assets at your incapacity or death. It necessitates entrusting others to make decisions about your finances and healthcare when you are unable. For this reason, retirement and estate planning often go hand in hand. Here’s what you need to know at a minimum to be prepared.
Social Security For Lifetime Income
If you are like many, the age that you can retire is dictated by how much you have saved for retirement and how much income you can reasonably expect to generate from those assets as well as from other sources such as social security, pensions and retirement accounts.
Social security retirement benefits typically do not begin until you are at least age 62, which is known as early retirement. Social security considers normal retirement age to be 66 unless you were born on or after 1960, in which case the normal retirement age is 67. Your social security benefits max out at age 70, meaning that you should expect to receive social security benefits no later than that age.
Notably, the sooner that you take social security retirement benefits, the less you receive. At age 62, you can expect to receive approximately 25-30% less than at full retirement age, whereas at age 70, you can expect to receive approximately 24-32% more. Notably, for each year that you wait to receive social security benefits, the payout amount increases by about 8% which is more than you might be able to generate each year by investing in conservative-to-moderate risk products. For this reason, waiting to receive benefits can pay off. It also makes sense to wait if you are in good health and have longevity in your family since benefits are payable for your life.
Pensions, Annuities and Life Insurance
With a typical defined benefit pension plan, when you reach a set retirement age defined by your plan, you can typically elect to have payments made to you for the rest of your life. The payment largely depends on how long you have worked for your employer and what payout option you select. Some plans give you the option of having payments made to you and your spouse for the rest of your lives in return for a reduced payout rate.
As you head towards retirement, it is important that your pension administrator provide you with a quote based on the payout options available to you. To the extent that you are offered a lump sum in lieu of a lifetime payout, it is wise to compare your projected pension payout with the payouts of immediate annuities. These annuity products, which are issued by insurance companies, can provide you with lifetime income in return for a lump sum payment up front. Various payout options are available. Since annuities can mimic a pension, it is commonplace to compare the payout rates of both to determine which one is more favorable. However, don’t be in any rush to take a lump sum from your pension as that decision is generally irrevocable. Likewise, an immediate annuity is typically irrevocable.
Depending on the payout option you select with pensions and annuities, both can provide death benefits to your loved ones if you pass away; however, these payouts are not the same as life insurance. With life insurance, you make one or more payments to the insurance company in return for the insurance company’s payment to your beneficiaries when you die. In essence, you are shifting the risk of dying prematurely to the insurance company in return for a fee. Life insurance can allow your spouse, children or other loved ones to receive a tax-free, lump sum payment which can help them offset the loss of income as a result of your death. Conversely, all or a portion of annuity death benefits might be taxable to your beneficiaries, and the amount which your beneficiaries receive could be largely uncertain because of how your particular annuity functions.
Retirement Accounts
Perhaps you have a 401(k), 403(b) or some other investment account that you have been contributing to over the years. Most Americans rely on these accounts to supplement the income that they receive through social security and their pensions. Generally speaking, if you withdraw no more than 3-4% per year, then you give yourself a chance at sustaining those withdrawals throughout your retirement. Anything more than 3-4% increases your risk of depleting your account. Also, as you approach retirement, you may want to consider reallocating your portfolio of stocks, bonds and money market securities to assume less risk especially since investing aggressively could result in serious declines in the value of your portfolio – declines that you might not be able to recover from. The old adage is that 100 minus your age reflects how much you should consider investing aggressively; however, each person’s situation is different.
Factoring In Expenses, Inflation
Without knowing your anticipated expenses in retirement, it is impossible to know how much income that you will truly need, and in turn, whether you are ready to retire. To get an approximation of your expenses, take into account your monthly mortgage (or rent), utilities, taxes, insurance, transportation, credit card payments, groceries and any other expenses that you foresee paying consistently throughout your retirement. You need at least enough income to cover these baseline expenses.
Other expenses such as entertainment and traveling are important to take into account too; however, they are discretionary in nature which means that you can likely avoid those expenses if necessary. In fact, if you are like many, unforeseen expenses could cause you to have less money set aside for discretionary spending.
Note that inflation could also erode your buying power over time because of increased prices for goods and services. If you are depending on a fixed income, then this means that continued inflation could result in you having to supplement that fixed income to offset inflation unless you are invested in products which provide for inflation adjustments.
Don’t Forget About Long-Term Care
Whether it is through at-home care, an assisted living facility or a nursing home – long-term care can be really expensive. Few Americans have long-term care policies to cover this cost of care. Not only that, but if you try to purchase one of these policies in retirement, you might be ineligible due to your health condition. This could leave you with having to pay out of pocket at a rate of thousands per month.
Medicaid, rather than Medicare, could pay for your long-term care; however, this needs-based program is typically only available to those with little assets, if any. For this reason, a growing number of retirees have taken steps to plan ahead as it relates to long-term care. Specifically, with the help of an elder law attorney, you might be able to implement strategies that can preserve and protect a significant portion of your assets while still allowing you to become eligible for Medicaid.
Can You Retire At This Point?
Add up the monthly income that you can reasonably expect to receive from social security, pensions, retirement accounts and other sources. Next, add up the monthly expenses that you reasonably expect to incur throughout your retirement. Does your income exceed your expenses? If the answer is yes, then this is a sign that you might be set to retire. However, if those numbers are close, or if you are only able to adequately cover your baseline expenses instead of discretionary expenses, then you should consider continuing to work if possible until such time that your retirement income is expected to cover your expenses. In fact, even if you are able to retire, it could still make sense to stick it out a few more years to build an additional safety net.
Another way of determining the income that you might need to secure your retirement is by following the 80% rule. That is to say, you could aim for your social security, pensions and retirement portfolio to generate 80% of what you make in your final year of work prior to retirement.
Getting Your Estate Planning Done Sooner Rather Than Later
It is never too early to get your estate planning done because you typically do not know when you are going to become incapacitated or die. Basically, estate planning is your instruction for someone to administer your assets at your incapacity and distribute them after your death. Typical estate planning involves the creation of wills, powers of attorney, trusts and other legal documents.
A last will and testament – commonly known as a will – lays out instructions for what to do with your assets when you die. Those assets could include bank accounts, furniture, jewelry, and any other property which is titled in your name or your estate at your death.
A living will (also known as an advanced healthcare directive) specifies in advance whether you want life-sustaining treatment at the end of your life when you are unable to give or withhold consent. An example of a living will situation might be a decision of when to withdraw life support after a terminally ill patient has lost consciousness. The Indiana living will statute has a drafting defect that makes Indiana living wills basically worthless, so we recommend that Indiana residents designate health care representatives to make these difficult decisions.
A health care power of attorney or appointment of health care representative is applicable when you are not able to make or communicate your own health care choices. Your health care representative is supposed to discuss health care decisions with you if possible but can act for you if that conversation is not possible. You can even authorize your health care representative to make end-of-life decisions under the circumstances that a living will would cover in states other than Indiana. This includes discussing your health care wishes with your physicians and consenting or refusing treatment.
A trust is an arrangement where you select a person known as a trustee to administer and distribute your assets. Trusts can be set up before you die or can come into existence at your death. Assets that you place into a revocable trust, which you typically control, can ultimately pass to your trust beneficiaries without the need for probate – an often time-consuming court-supervised process of distributing assets held in your estate at your death. Irrevocable trusts, on the other hand, might be used for things like asset protection or qualifying for public benefits.
A power of attorney is an authorization of someone whom you choose as your agent (or attorney-in-fact) to make personal business decisions on your behalf mainly as it relates to your finances and legal matters. Specifically, a durable power of attorney allows your agent to make a variety of financial decisions on your behalf during your life, whether you are incapacitated or not, whereas a nondurable power of attorney becomes void when you are incapacitated.
Notably, fiduciaries (e.g. trustees, agents, executors) have a duty to act in good faith, meaning that they must act in your best interest. For this reason, whoever you designate as your fiduciary should be someone who is ethical, trustworthy, and who is able to carry out your wishes.
Indiana Estate And Medicaid Planning Attorneys
For more than two decades, the attorneys at Hawkins Elder Law have helped countless clients with preparing estate plans that are tailored to their needs and which provide for the effective management of their assets. Founders Jennifer J. Hawkins and Jeff R. Hawkins are Board Certified Indiana Trust and Estate Lawyers, certified by the Trust and Estate Specialty Board. Reach out to Hawkins Elder Law today by calling (812) 268-8777 or by contacting us online.
About the Authors
Jeff R. Hawkins and Jennifer J. Hawkins co-author the Hawkins Elder Law blog with Thomas E. Hynes, a lawyer who is admitted in Pennsylvania, New Jersey and Florida with a background in estate planning and elder law.
Jeff and Jennifer Hawkins are Trust & Estate Specialty Board Certified Indiana Trust & Estate Lawyers. They are also active members of the Indiana State Bar Association and National Academy of Elder Law Attorneys. Both lawyers are admitted to practice law in Indiana, and Jeff Hawkins is admitted to practice law in Illinois.
Jeff is a Fellow of the American College of Trust and Estate Counsel and the Indiana Bar Foundation. He is also a member of the Illinois State Bar Association and the Indiana Association of Mediators. He served as the 2014-15 President of the Indiana State Bar Association, and he is a registered civil mediator.
Hawkins Elder Law is one of the few elder law firms that Martindale-HubbellTM has rated AV Preeminent, with both of the firm’s lawyers (Jeff Hawkins and Jennifer Hawkins) also rated AV Preeminent.
More Information
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