Has Your Financial Plan Caught Up to Your Life?
Major life events—marriage, the birth of a child or grandchild, the death of a spouse—are almost always busy and highly emotional occasions. Investments, insurance and retirement planning all recede into the background during the joy that attends the birth of a newborn or the grieving process that accompanies the death of a loved one. Moreover, it’s just human nature to put off thinking about retirement and estate planning, particularly when the daily routines of work, home and family present so many challenges. But letting your financial plan fall too far behind the changes in your life can put your financial future at risk. Below, we outline some of the major life events that should prompt you to readjust your financial plan.
Marriage
Start planning for retirement. It may seem unromantic, but starting early is the key to greater wealth in retirement. The reason is simple: you want your assets to have as much time as possible to grow in tax-deferred accounts like deductible and Roth IRAs, and 401(k) and 403(b) plans. If both you and your spouse are employed by companies that sponsor retirement plans, your goal should be to fund both plans at least up to the level of your employers’ matching contributions. If that’s not in the budget, then fund the plan with the best features, i.e., employer match, investment options, vesting schedule and loan program. If you are able to make the maximum contributions to your employer-sponsored plans, think about sheltering more income in a traditional or Roth IRA.
Make a will. If you’ve put it off, now is the time for you and your spouse to get a will drawn up. Include a living will and a health care power of attorney so that your spouse will know your wishes and have the authority to make health care decisions on your behalf in the event you are unable to do so.
Think about insurance. If one spouse is the sole breadwinner, then a life insurance policy probably makes sense. Consolidating auto insurance under one carrier can often save on monthly premium costs.
Birth of a Child or Grandchild
Begin saving for college. The cost of a college education has been outpacing inflation for years. According to the College Board, the organization that administers the SAT, the average cost of attending a four-year private college during the 2008-2009 academic year was $25,143 (9 percent of private institutions cost $33,000 or higher). Congress changed the Internal Revenue Code in 2001 to make tax-advantaged 529 plans a particularly attractive option for college saving. While these plans are typically funded with after-tax dollars, assets grow tax-free, and distributions are also tax free if spent on qualified educational expenses. Certain states, which sponsor the plans, allow in-state residents to take a state tax deduction for their 529 contributions.
Take advantage of the gift-tax exemption. You can give up to $13,000 per recipient per year without triggering the gift tax. Married couples can give up to $26,000 per recipient. Taking advantage of this provision of the tax code can be a useful way to deplete an estate that would otherwise trigger the estate tax while helping to fund a child’s 529 plan or trust.
Update estate and insurance documents. Be sure to update life insurance policies to reflect the fact that your family now includes a child. Married couples with enough assets to trigger the estate tax ($3.5 million in 2009) should consider advanced estate planning strategies such as credit-shelter trusts, charitable giving, and sheltering assets in a Roth IRA.
Divorce
Avoid the retirement account tax trap. Note that in almost every state, courts consider amounts contributed to retirement accounts during the marriage to be marital property. It’s absolutely critical that retirement accounts—including employer-sponsored plans as well as IRAs—be divided pursuant to a qualified domestic relations order (QDRO) issued by the court or by your divorce property settlement. If not, then any distributions from these accounts will be treated as taxable events, and you will be on the hook for taxes and penalties.
Take charge of your finances. If your ex-spouse was the one who paid the bills and managed the investments, you may want to meet with a financial adviser to discuss retirement and tax planning.
Update important documents. Update bank accounts, estate documents such as wills and trusts, life insurance policies, and beneficiary designations on retirement accounts. If you fail to do so, your ex-spouse could inherit from your payable-on-death accounts like joint bank accounts and retirement accounts.
Death of a Spouse
Collecting spousal benefits. If you are over 60 at the time of your spouse’s death and your spouse paid into the Social Security system for at least 10 years, then you will be eligible for survivor’s benefits. In addition, most insurance policies will pay out directly to the named beneficiary upon proof of the policy-holder’s death. You will likely have to choose whether to take a single lump sum or a series of periodic payments. It’s important to consider the tax consequences of this decision. A large lump sum payment may seem appealing as a way to pay off debts immediately, but it could bump you up into a higher income-tax bracket. If your spouse was employed at the time of death, his or her benefits coordinator will be able to answer questions about spousal pension benefits or other employer-sponsored retirement plans your spouse may have participated in.
Jointly-owned assets. As a general rule, any assets that were jointly held by you and your spouse will pass directly to you outside of the probate process. This includes joint bank accounts and real property held jointly with right of survivorship. For other assets that were titled solely in your spouse’s name but that have passed to you through a will (or through your state’s laws of intestacy), you will have to have them re-titled in your name. Your state’s Department of Motor Vehicles will be able to advise you on the proper procedure for re-titling an automobile. Consult an attorney for assistance with changing the name on title documents to real property.
Update retirement plans. The death of a spouse may change the way you think about your retirement. You may decide to sell the principal residence and move. The death of the main breadwinner may require a new investment strategy, with a focus on income generating assets. A consultation with a financial adviser can help.
