Protecting Your Wealth in Retirement

Protecting Your Wealth In Retirement

We are pretty far along in creating an optimal plan that aligns your finances with your ideal retirement! We’ve created a long-term cash flow, tax and investment strategy, but the odds are extremely low that the initial plan you develop will play out the way it’s currently constructed – there are simply too many variables involved. Since no one has a crystal ball, you have to plan for the unexpected to protect yourself and your family from unforeseen events such as death, disability and long-term care needs. These events could reduce your income, increase your expenses and deplete assets you’ve accumulated for years at an alarmingly high rate. Running “stress tests” on the plan you have constructed thus far is important to ensure your contingency plans are adequate.

Wealth Protection

Everything we do involves some level of risk, but our objective is to accomplish our goals with the least amount of risk. One way to reduce risk is by transferring it to a third-party by purchasing insurance. While there are insurance policies available for many types of risks, it makes the most sense to protect yourself against events that have lower odds of occurring, but have high consequences.

The three primary risks that you will want to protect yourself from in retirement are:

  • Death
  • A Long-Term Care Event
  • Liability

You will also need to balance the benefits of insurance with the cost. Long-term care insurance in particular is becoming extremely expensive because the cost of the care itself is also expensive, so it’s important to at least evaluate your options.

Life Insurance

Losing a spouse can be devastating, whether the death is sudden or following a long illness. One day you are married; the next day you are single, alone, and grieving. In some situations, both spouses are fully aware of the family’s financial situation, while in others, the only one with complete knowledge is the one who has died.

Life insurance is used to protect your heirs from a shortage of financial resources upon the primary household income earner’s death. If you have saved well for retirement it’s entirely possible that you don’t need insurance anymore, however that’s not always the case. In a married household where both spouses are receiving social security benefits, the lower social security benefit will cease upon either spouse’s death. If there is a pension benefit that is currently being received, it’s likely that benefit would be reduced or discontinued as well. If the income reduction is significant enough, life insurance can supplement the now-reduced cash flow. The way to determine this is to model out the scenario in your plan to see when/if the surviving spouse runs out of assets, as in the example below.

Life insurance what-if scenarios to help you determine how much top invest.

Long-Term Care Insurance

Another risk that must be addressed in retirement is the impact of a long-term care event. It is the biggest risk retirees face due to the unexpectedness and financial devastation it can cause. A long-term care event can last for multiple years, straining cash flows and draining financial savings at an accelerated rate. While there are various insurance options to assist in transferring some of this risk, many of these policies can be cost-prohibitive. I recommend working with an insurance professional that has your best interests in mind if you are looking for long-term care insurance solutions. The insurance arena is constantly changing and products are becoming more and more complex. The long-term care analysis is similar to our life insurance analysis, in that we are attempting to determine whether this event will cause you to outlive assets. In the example below, you can see that this couple both need some long-term care insurance if they choose to fully insure this need.

Charts comparing long-term care insurance

Liability Insurance

We all have auto and homeowners insurance to protect ourselves from the loss of property, but there are other important features when it comes to wealth protection. The liability portion of your homeowner’s policy covers you against lawsuits for injury that you or your family members cause to other people. It also pays for damage caused by your pets. With your auto policy, bodily injury liability protection applies to the medical expenses of the other party if you are found at fault in the accident. In some circumstances, it may even cover lost wages and/or legal fees if the injured party files a lawsuit. While these policies are sufficient for some people, their coverage is limited. When your net worth is much higher than what these policies insure, you should consider an umbrella policy to provide you with the extra liability coverage you need. Assessing the risks that could derail your plan is important, so make sure to download your Free Retirement Checklist to ensure you don’t miss any important steps.

Wealth Transfer

The last step of your plan is to ensure that if something happens to you, your estate is set up in a way that transfers your assets efficiently and according to your intentions. In the absence of an estate plan, your estate can be subject to probate, the process whereby the distribution of your estate is subject to the laws of intestacy in your state of residence at the time of your death. By subjecting your estate to probate, not only do you lose control of the distribution of your estate, but you are subject to probate court fees (as high as 4% in California). Many people obtain wills, but a will DOES NOT protect your estate from probate. The most effective estate planning document to protect assets from probate and control how assets are distributed to heirs is by drafting a living trust. In addition to a living trust, you will also want to have powers of attorney in place for health and financial decisions. In the event that you are mentally incapacitated, these documents will allow your appointed agent acting on your behalf to do so in accordance to your intentions. Once you have all of these documents in place, the last step is to review the titling and beneficiary designations of all of your assets. I’ve come across many people who get an estate plan drafted, but fail to title important assets such as real estate in the name of their trust.

If you have made it this far, give yourself a pat on the back – most of the heavy lifting is done! To summarize all of the steps we have taken to complete your plan, they are in order:

  • Visualize your retirement
  • Gather your financial documents
  • Create financial statements
  • Creating your retirement plan
  • Selecting the right investment strategy in retirement

The order of the steps is nearly as important as the steps themselves, so make sure to download your Free Retirement Checklist as a good point of reference. We start with cash flow and tax planning, since creating tax-efficient income is your primary objective in retirement. Next, we work on investment decisions, since your investment strategy should reflect your retirement cash flow needs. Finally, we ensure you have a proper wealth protection and transfer plan to protect all your hard-earned income and savings that your cash flow, tax-planning and investment strategies have created. Remember, your retirement plan is a blueprint that will need to be constantly monitored and adjusted on an ongoing basis, so in my final two articles, I will explain how to implement your retirement plan and monitor your plan throughout retirement.



Author: Danny Michael
Danny G. Michael has 17 years of experience as an advisor working with individuals, families and business owners. Danny has also been a Certified Financial Planner™ since 2006 and is also an Accredited Investment Fiduciary.

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