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Estate Planning And Retirement Benefits

Estate Planning And Retirement Benefits

Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve those goals. Retirement planning includes identifying sources of income, estimating expenses, implementing a savings program, and managing assets and risk. Future cash flows are estimated to determine if the retirement income goal will be achieved. Some retirement plans change depending on whether you’re in, say, the United States, or Canada. Retirement planning is ideally a life-long process. You can start at any time, but it works best if you factor it into your financial planning from the beginning. That’s the best way to ensure a safe, secure and fun retirement. The fun part is why it makes sense to pay attention to the serious and perhaps boring part: planning how you’ll get there.

In the simplest sense, retirement planning is the planning one does to be prepared for life after paid work ends, not just financially but in all aspects of life. The non-financial aspects include lifestyle choices such as how to spend time in retirement, where to live, when to completely quit working, etc. A holistic approach to retirement planning considers all these areas. The emphasis one puts on retirement planning changes throughout different life stages. Early in a person’s working life, retirement planning is about setting aside enough money for retirement. During the middle of your career, it might also include setting specific income or asset targets and taking the steps to achieve them. Once you reach retirement age, you go from accumulating assets to what planners call the distribution phase. You’re no longer paying in; instead, your decades of saving are paying out. Remember that retirement planning starts long before you retire—the sooner, the better. Your “magic number,” the amount you need to retire comfortably, is highly personalized, but there are numerous rules of thumb that can give you an idea of how much to save. People used to say that you need around $1 million to retire comfortably. Other professionals use the 80% rule (i.e., you need enough to live on 80% of your income at retirement). If you made $100,000 per year, you would need savings that could produce $80,000 per year for roughly 20 years, or $1.6 million. Others say most retirees aren’t saving anywhere near enough to meet those benchmarks and should adjust their lifestyle to live on what they have. Whatever method you, and possibly a financial planner, use to calculate your retirement savings needs, start as early as you can.

Stages of Retirement Planning and Estate Plans

• Young Adulthood (ages 21–35): Those embarking on adult life may not have a lot of money free to invest, but they do have time to let investments mature, which is a critical and valuable piece of retirement savings. This is because of the principle of compound interest. Compound interest allows interest to earn interest, and the more time you have, the more interest you will earn. Even if you can only put aside $50 a month, it will be worth three times more if you invest it at age 25 than if you wait to start investing at age 45, thanks to the joys of compounding. You might be able to invest more money in the future, but you’ll never be able to make up for the lost time.

• Early Midlife (36–50): Early midlife tends to bring a number of financial strains, including mortgages, student loans, insurance premiums, and credit card debt. However, it’s critical to continue saving at this stage of retirement planning. The combination of earning more money and the time you still have to invest and earn interest makes these years some of the best for aggressive savings. People at this stage of retirement planning should continue to take advantage of any 401(k) matching programs their employers offer. They should also try to max out contributions to a 401(k) and/or Roth IRA (you can have both at the same time). For those ineligible for a Roth IRA, consider a traditional IRA. As with your 401(k), this is funded with pre-tax dollars, and the assets within it grow tax-deferred. Finally, don’t neglect life insurance and disability insurance. You want to ensure your family could survive financially without pulling from retirement savings should something happen to you.

• Later Midlife (50–65): As you age, your investment accounts should become more conservative. While time is running out to save for people at this stage of retirement planning, there are a few advantages. Higher wages and potentially having some of the aforementioned expenses (mortgages, student loans, credit card debt, etc.) paid off by this time can leave you with more disposable income to invest. And it’s never too late to set up and contribute to a 401(k) or an IRA. One benefit of this retirement planning stage is catch-up contributions. From age 50 on, you can contribute an additional $1,000 a year to your traditional or Roth IRA, and an additional $6,000 a year to your 401(k).

A pension plan (also referred to as a defined benefit plan) is a retirement account that is sponsored and funded by your employer. It’s based on a formula that includes factors such as your salary, age, and the number of years you have worked at your company. For example, your pension benefit might be equal to one percent of your average salary for the last five years of employment, and then times your total years of service. Over the years, your employer makes contributions on your behalf and promises to make you regular, predetermined payouts every month when you retire. A 401k plan is a retirement account that’s made available to employees who wish to save for their retirement (provided their employer offers a plan). In this case, it’s the employer that holds back a part of your salary (tax-deferred) and places it into a fund that you’ll receive when you retire. Some employers are even willing to match the contributions made by their employees with their own money. Since 401(k) plans are meant to encourage you to save for retirement, there are heavy tax penalties imposed for early withdrawals (before age 59½).

Estate Planning For Pension Plan And A 401(K) Plan

• A pension plan is funded by the employer, while a 401(k) is funded by the employee. (Some employers will match a portion of your 401(k) contributions.)

• A 401(k) allows you control over your fund contributions, a pension plan does not.

• Pension plans guarantee a monthly check in retirement a 401(k) does not offer guarantees.

• Pension plans have been in existence for a long time, while 401(k)s are gaining in popularity. In fact, the 401(k) will most likely be replacing pension plans all together in the near future. However, there are still employers who offer both a pension plan and a 401(k) plan – if you’re lucky enough to be in that fortunate situation.

Factors to Consider While Planning for Your Retirement

Retirement planning is essential and should be considered by almost everyone at an early stage of their professional life. That’s because post retirement is a journey in an individual’s life where he/she wants to get away from all the struggles of life and spend his/her sunset years in calmness and peace without bearing any financial burdens. But to enjoy a peaceful retirement life later in life, you might have to consider starting retirement planning sooner. That is because the early you start, the better it is because then, you stand a chance to save more. Planning your retirement at an early stage in life might buy you more time and also help you build a decent retirement corpus.

Here are a few factors to consider before retirement planning

• Keep a retirement budget: You know your expenses. You know how much money you need right now to survive on a monthly basis. The smart way to determine your retirement budget is to gather all your expense receipts and identify your current spending. Telephone bills, electricity bills, credit card, bills, restaurant bills, and grocery receipts; gather as much expense sources as you can so that you get an idea of your monthly expenses. Getting to know about your expenses is a good way to start with retirement planning.

• Identify your risk appetite: What type of investor are you? Are you an aggressive investor who doesn’t mind investing a large amount in equities with the hope of earning higher profit margins? Or are you a conservative type who doesn’t mind settling with a low but steady income? An individual’s risk appetite plays an important role in not just retirement planning but any type of investment planning. Make sure you understand your risk appetite before investing your hard earned money in any retirement scheme.

• Figure out how many years you have in hand before you retire: The difference between your current age and your approximate age of retirement defines the number of years you have in hand to build a retirement corpus. Investing in the direct equities offer high risk to return ratio. Having said that, investments made in the equities are exposed to market volatility and only if you have some appetite for risk, consider investing in equities. If you wish to stay away from direct equities, you can consider investing in mutual funds as mutual funds generally are capable of diversifying an investor’s portfolio. No matter where you invest, make sure you give yourself enough years to potentially grow your corpus.

• Income sources post retirement: Well, your monthly salary won’t be credited in your account any more, there can be other ways in which you might continue sourcing income. For example, you can receive a pension from your employer, you could own an extra home which you could give on rent, or you could be hired as a guest faculty in an educational institution and receive fees for sharing your expertise with the students. Are these sources of income adding up to help you build enough money so that you are ready for unexpected expenses? Retirement life can bring in unforeseeable expenses in your life, and you need to make sure that you are prepared for it.

• It’s never too late to start retirement planning: It can be really tough to find out that you are too late for the party. But with retirement planning, that’s not the case, and individuals need to understand that they can start retirement planning whenever they want. But if you start saving just years before retirement, make sure that you save a lot of money considering you will be having very few years in hand.

• Stay off debt: Well taking care of debts must feel like a cakewalk right now but trust us, you do not want to owe anyone money later in life, especially when you are about to retire. It is advisable to not have any pending loans or unpaid credits in the kitty as you near retirement. Pay off all your debts if you do not wish to lead a debt ridden retirement life.

• Invest within your limits: Although saving maximum to enjoy retirement is indeed a must, that doesn’t mean you invest all the money that you currently possess. Remember that no type of investment is considered to be safe. So it is advisable to invest within your limits and do not get lured by lucrative schemes offering exceptionally good interest rates. Invest within your boundaries and regularly invest, because this way you stand a chance of benefiting from the power of compounding.

Estate Planning Essential Documents for 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.

• 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.

• 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 Utah, 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 this, it is important to inventory the contents of your home 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 communicates 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.

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Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506
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