Jeremy Kisner Surevest Wealth Management
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This week we continue our list of most frequently asked retirement planning questions. Check out FAQs Regarding Retirement Planning (Part 1) if you missed it last week.
- How should I change my investments when I am getting close to retirement?
The idea that you need to invest more conservatively once you are retired (or nearing retirement) is only partially true. You should invest more conservatively (i.e., reduce volatility) in accounts from which you are taking withdrawals. The higher the withdrawal rate, the less volatility you should assume. For example, you should target lower volatility in an account that is distributing 5% per year compared to an account that is distributing 1-2% per year. The risk is that the money withdrawn after an account has declined will never have a chance to participate in the inevitable market rebound. It is further recommended that retirees have some “safe” money from which they can take withdrawals for a few years in the event of a significant market decline. Those safe investments can be held as part of the investment portfolio (short-term bonds) or separate from the portfolio (bank money). This pool of safe money enables you to let your more volatile investments rebound before you need to sell any of them.
Many retirees have accounts they do not plan to touch for many years, if ever. Those accounts can remain invested more aggressively (for growth).
For more on this topic read: Why Volatility Matters.
- Should I take the lump sum pension option or lifetime payments?
In general, you should take the lifetime payments when:
- You (and/or your spouse) are in good health and have longevity in your family
- You have a low risk tolerance
- You are not overly concerned about leaving money to heirs
- You need the full amount of money offered by the pension payments to cover your retirement living expenses
Take the lump sum if:
- You are in poor health and/or expect below average longevity
- You would need to withdraw 4% or less from the lump sum to cover your retirement living expenses
- You have a higher risk tolerance and leaving money to heirs is important to you
For more on this topic, read: Pensions—Lump Sum or Lifetime Payments.
- Should I put my retirement savings in annuities?
You are a good candidate for annuities if:
- You and/or your spouse are in good health and have longevity in your family
- Less than 60-80% of your desired retirement income will be covered by guaranteed income sources (e.g., Social Security or Pensions)
- You have a few years until you need to begin taking income (This allows you to buy the annuity and let the level of guaranteed income grow.)
- Do I need a Will or a Trust?
A will simply indicates which beneficiaries are to receive which assets, and who will oversee your affairs after you’re gone (executor). I recommend using an attorney to draft your will in order to minimize the chance that anyone will successfully be able to contest it. Some people handwrite their wills to save time or money. A handwritten will is valid, although it should be notarized and witnessed (or you videotape yourself reading it aloud). You can also get a basic will from a legal forms store or online at a site like legalzoom.com.
A will is certainly better than not having any estate planning documents. However, the problem with a will is: 1) it can be challenged in court, 2) your heirs will likely have to go through probate (a potentially expensive and time-consuming legal process), and 3) you lose confidentiality because your financial affairs can become public record.
Most people with significant assets use a revocable living trust as opposed to (or in addition to) a will. This beautiful set of documents is usually presented in a nice-looking three-ring binder and costs two to three times as much to create as a will. The trust enables you to name beneficiaries and a “successor trustee” who takes over when you are no longer capable. The main advantage of the trust (compared to a will) is your heirs get to avoid probate, your affairs remain private, and it is much more difficult to contest a trust than a will. The other advantage of the trust is it can remain intact and continue to hold and distribute assets for many years after your passing. For example, you can instruct your successor trustee to distribute assets to your children when they reach a certain age, or distribute the assets over a period of years. Another popular strategy is to name an income beneficiary, who gets the income from your trust after your death (e.g., spouse from your second marriage) and then residuary beneficiaries who get the assets after the income beneficiary dies (e.g., kids from your first marriage).