Newly Retired? 4 Considerations to Protect Your Benefits
Congratulations on your retirement. You have worked hard to reach this milestone, and now it is time to enjoy the fruits of your labor. But retirement is not the end of the planning process – it is the beginning of a new chapter that requires careful attention to your estate plan. Here are four critical considerations for newly retired individuals and couples.
1. How do estate planning documents and retirement planning work together?
Your estate plan and your retirement plan are two sides of the same coin. Your retirement plan determines how you will fund your lifestyle during retirement, while your estate plan determines what happens to your assets when you pass away – and who makes decisions for you if you become unable to make them yourself.
The documents in your estate plan – your will or trust, your statutory durable power of attorney, your medical power of attorney, and your advance directive – work in tandem with your retirement accounts, Social Security benefits, pension plans, and insurance policies to create a comprehensive safety net. If any of these documents are outdated, missing, or inconsistent with your current wishes, the entire system can break down.
Now that you are retired, you are likely drawing income from your retirement accounts, Social Security, and possibly a pension. The way these benefits are structured, titled, and designated can have significant tax and estate planning consequences. It is essential to review your estate plan in light of your retirement income sources and make sure everything is coordinated.
2. How does the death of one spouse affect retirement planning?
The death of a spouse is one of the most significant events that can affect your retirement plan. When one spouse passes away, the surviving spouse may lose a Social Security benefit, a pension benefit, or both. The surviving spouse may also move into a higher tax bracket as a result of filing as a single taxpayer rather than as married filing jointly. These changes can dramatically reduce the surviving spouse’s income at precisely the time when expenses may be increasing due to the need for additional help or care.
A well-designed estate plan anticipates these changes and provides for the surviving spouse accordingly. This may include life insurance to replace lost income, a trust that provides supplemental income, or strategic Roth conversions that minimize the tax impact of losing a spouse. The key is to plan ahead, while both spouses are still living, so that the surviving spouse is not caught off guard.
3. When did you last review your beneficiary designations?
Beneficiary designations on retirement accounts, life insurance policies, and annuities are among the most important – and most frequently overlooked – components of an estate plan. These designations control who receives these assets when you pass away, and they override your will or trust. That means if your beneficiary designation names your ex-spouse, your ex-spouse will receive the asset – even if your will says otherwise.
The importance of keeping beneficiary designations current was illustrated dramatically in the United States Supreme Court case of Clark v. Rameker. In that case, the Court held that inherited IRAs do not qualify for the same bankruptcy protections as retirement accounts owned by the original account holder. This means that if you leave an IRA to a beneficiary who later files for bankruptcy, the inherited IRA may be available to the beneficiary’s creditors. Proper planning – including the use of trusts as designated beneficiaries – can protect inherited retirement assets from creditor claims.
Review your beneficiary designations at least once a year and after every major life event, including marriage, divorce, the birth of a child or grandchild, and the death of a beneficiary.
4. What is your plan to pay for long-term care?
Long-term care is one of the greatest financial risks facing retirees. Approximately 70% of people over the age of 65 will need some form of long-term care during their lifetime. The cost of that care can be devastating – a private room in a nursing home can cost $100,000 or more per year, and care needs can last for years.
Medicare provides limited coverage for skilled nursing care following a hospital stay, but it does not cover custodial care – the type of care most people need when they can no longer perform activities of daily living on their own. Traditional health insurance does not cover long-term care either. Without a plan, the cost of long-term care can quickly consume the assets you spent a lifetime accumulating.
There are several options for paying for long-term care, including long-term care insurance, hybrid life insurance/long-term care policies, self-insuring from savings and investments, and Medicaid (for those who qualify). Each option has its own advantages and limitations, and the right choice depends on your health, your financial situation, and your family circumstances.
At The Stegall Law Firm, we help newly retired individuals and couples address all four of these critical considerations – and more. Our goal is to help you protect the benefits you have earned, provide for your spouse and your family, and enjoy your retirement with confidence and peace of mind.
Sources:
- Clark v. Rameker, 573 U.S. 122 (2014).
- U.S. Department of Health and Human Services, Long-Term Care Information.
- Social Security Administration, Survivors Benefits.