Everything Baby Boomers Need to Know for a Secure Retirement
Almost all of us pass through several major transitions during our lifetime.
After we’re born, there’s a period of dependency as we learn how to survive (and hopefully thrive) in the world.
Then we leave our parents (or other guardians), venture into the world and begin supporting ourselves. Many of us marry or otherwise form committed relationships. Many of us bring children into the world and raise them until they reach their own independence.
Then we reach a stage that’s been rather awkwardly described as “retirement.” It’s a troublesome word for a phase of life that begins when we stop actively working and ends when we die. But we’ll use it here, as we describe everything Baby Boomers need to know for a secure retirement.
Chapter 1: Retirement Planning
Chapter 2: Risk Management
Chapter 3: Investing Basics
Chapter 4: Income and Tax Planning
Chapter 5: Estate Planning for Boomers
The largest generation in history (until the Millennial generation arrived) has actually already begun entering retirement. The oldest Boomers were born in 1946. So, they’re well into their 70s and many have been retired for several years.
But most younger Boomers are still several years away from retiring. So, we’re sharing ideas here that are relevant to all Boomers as they navigate retirement.
When Should You Retire?
There are a series of questions you should ask yourself, as you contemplate retirement. The first question is, when? The answer to this rather basic question is probably more complicated than you might first think. Deciding when to retire involves assessing your situation from several perspectives. At the most basic level, you have to determine if you have enough financial resources to meet your spending needs for the rest of your life. If you don’t, then you’ll need to defer retirement until you do.
How Much Will You Need?
Another related question is, how much money will you need? There are various ways to determine this. Perhaps the easiest is to place to start is to simply tally how much you’re spending currently and then consider how your spending will change in retirement. One rule of thumb says that at retirement you’ll need 25 times the annual amount you expect to spend in retirement. So, if you expect to spend $100,000 a year, then you’ll need $2.5 million when you retire. A far better approach to answering this question would be to work with a CERTIFIED FINANCIAL PLANNER™ who can take you through a thorough analysis of your unique situation.
What To Do When You Retire?
Assuming you’ve saved enough to retire, what will you do in retirement? You’ll have a lot of free time that was previously taken up by your work. Will you fill it with family involvement, community service, hobbies, spiritual journeys, exercise, or travel? The happiest people in retirement are those who are actively engaged in activities that are important and fulfilling to them. So, make sure you know what you’ll do with your retirement life.
Will You Work?
Do you plan to work part time in retirement? If so, will you work for your last employer? Will you start a business? Will you consult in your field of work? How much will you work? How much can you earn?
Research on retirement indicates that far fewer people actually work in retirement than thought they would. So, if you’re planning to work in retirement, it would be wise to not rely on those earnings in your financial plan for retirement. If you’re able to work and earn additional income, your plan will be that much stronger.
Where Will You Live?
After people retire, they often move, for a variety of reasons. Couples who raised children in a large house may decide to downsize to reduce costs, free up resources and shrink their home maintenance responsibilities.
If you live in a high-tax state, perhaps it makes sense to move to a state that has lower taxes. Some states are friendlier to retirees than others. Kiplinger shows them on a map where you can compare states that might interest you.
Perhaps you’re looking for a change in climate (or to escape fire and smoke). If you live in the rainy Pacific Northwest of Oregon or Washington, you might want to escape to the sunnier American Southwest.
Maybe you’re looking to leave a place with a high cost of living. If you live in the Bay Area in California, you can probably sell your house, pay cash for a nicer, less expensive house in a different part of the country, and pocket the difference.
If you’re tired of living in a congested urban setting, perhaps you want to move to the suburbs, the country or the mountains.
If you have kids, grandkids or other cherished family or friends who live elsewhere, perhaps you’ll move to be closer to them.
Regardless of your motives, you should think about your ability to access quality, affordable health care wherever you decide to live. After housing costs, medical expenses are the largest item for most retirees. You can control these costs, at least to some extent, by where you live. Also, if you retire early, make sure you know how you’ll pay for health insurance before you qualify for Medicare at age 65.
So, there are lots questions facing Boomers as they contemplate a secure retirement.
Retirement, like every other phase in life, is filled with risks. Boomers need to anticipate these risks and approach retirement with a plan to address them.
When faced with risks, you have several options. You can avoid it. You can accept it. You can transfer it or insure against it. So, let’s consider the risks that face Boomers in retirement.
Getting Sick or Hurt – Health Insurance
It’s certainly possible that you could become sick or hurt during retirement. Because the costs for medical care can be significant, Boomers need to have health insurance.
Fortunately, eligible Americans are able to participate in Medicare, the federal health insurance program for people who are 65 or older. Medicare is not comprehensive health insurance, however. So, you’ll need to either enroll in a Medicare Advantage plan or purchase Medicare supplemental insurance (called Medigap).
The rules surrounding Medicare are complex and mistakes can be costly. So, you should work with an expert, such as your state health insurance assistance program (SHIP) or an insurance broker who specializes in Medicare and Medicare supplement plans.
Dying – Life Insurance
Why would you need life insurance in retirement? There are actually many reasons why Boomers may wish to have life insurance.
If you’re among the fortunate few who will retire with a defined benefit pension plan, you have a planning opportunity. Normally, married recipients of these plans take the joint-and-survivor option which will provide a benefit (e.g. 50%, 75% or even 100%) to the surviving spouse. In fact, this is the default option by law. The survivor option provides a benefit that’s lower than the single life option.
However, if you had the proper amount and type of permanent life insurance, you could opt to take the (higher) single life payout. Then, if you were to die prematurely in retirement, the life insurance would replace the income your spouse would have received under the joint-and-survivor option. Your spouse would have to sign-off on this single-life election with the pension plan administrator.
There are many other reasons to have life insurance in retirement. Life insurance can replace the Social Security income that’s lost if one spouse predeceases the other early in retirement. It can provide funds for estate gifts to family and charity. Life insurance proceeds can be used to pay off debts that you might carry into retirement, like a home mortgage. It can provide funds to pay estate taxes. Life insurance can also fund emergencies, provide a source of income, and, under certain circumstances, pay for end-of-life care.
Living Too Long – Annuities
There are a two very significant risks in retirement, and living “too long” is one of them. You might think that living a long life is a blessing, and it can be, if you arrive in old age in good health and with financial resources. Unfortunately, people who live beyond normal life expectancy can face the prospect of having drained their with very little left to sustain them in their last years.
There’s a simple and elegant solution to this problem – annuities. Annuities provide guaranteed income that can’t be outlived. An annuity is a contract between an individual (or couple) and an insurance company. In its simplest form, an annuity involves the exchange of a lump sum of money for a stream of income that lasts for life. There are many varieties of annuities.
As financial planners, we know that retirement plans that include guaranteed income are stronger than those that don’t. While that might seem obvious, it’s been proven mathematically by academics. We also know that the more guaranteed income you have, the stronger your plan will be.
The ultimate annuity is Social Security. It provides income that’s guaranteed by the government. The income is provided for life and it’s adjusted annually for inflation. The more Social Security you have in retirement, the better financial shape you’ll be in.
If you’re fortunate enough to enter retirement with an employer-provided pension, you’ll have additional annuity income to count on. Your pension probably won’t increase over time for inflation. But it’s still a valuable resource.
Boomers who want additional guaranteed income should consider buying an immediate (or deferred) annuity from a highly-rated insurance company. Annuities are one of the best tools to create a secure retirement.
Needing Care – Long-Term Care Insurance
We mentioned that there are two risks that are particularly threatening to Boomers in retirement. One is living too long. The other is becoming infirm and unable to care for yourself.
The longer you live, the more likely it is that you’ll need assistance caring for yourself. If you don’t live a healthy lifestyle, you’re more likely to need care regardless of how long you live.
According to the Department of Health & Human Services 52% of Americans who are age 65 will need long-term services and support. According to AARP, men will need care for an average of 1 1/2 years and women will need care for an average of 2 1/2 years. One in seven will require care for more than five years.
Care can be provided at home, in an adult day-care facility or in a variety of long-term care facilities. Most people want to stay home as long as possible. That often places the burden of care on family members. This may become unsustainable if the care needs are too great and/or those providing care are unable to continue provide it.
Care in any setting is expensive. In Portland, Oregon, adult day care is $85 per day, in-home care is $23 per hour, assisted living is $3,895 per month, and a semi-private room in a nursing facility is $265 per dayday. In Santa Cruz, California, adult day care is $120 per day, in-home care is $31 per hour, assisted living is $5,250 per month, and a semi-private room in a nursing facility is $8,973 per month. We’ve had clients in memory care facilities who have spent in excess of $20,000 per month for care.
No one wants to end up needing care. But what will you do, if you need help in the later years of your life? Now is the time to think about. Who will provide the care you need? How will you pay for it?
There are several ways for Boomers to address the risk of becoming infirm. You can self-insure by setting aside some of your assets to pay for care if and when you need it. You could also purchase long-term care insurance which would pay for the care you might one day need.
If you think the federal government will pay for your long-term care, please know that this is highly unlikely. Medicare does not cover long-term care. Medicaid can provide this care, but you must be all but impoverished to qualify for it. So, for a secure retirement, have a plan for care late in life and don’t count on the government.
Inflation – Stocks
While inflation has been very low for several years, this hasn’t always been the case. As a Boomer, you probably remember the period in the 1970s and early 1980s during when inflation averaged nearly 8% per year.
Inflation is very hard on retirees. While it makes things more expensive for everyone, it tends to drive up the cost of the things retirees buy (like health care) even more. So, it’s really important for Boomers to plan for potential inflation.
If we assume that future inflation will be 3%, then the car that costs $40,000 today will cost $53,800 in ten years. A medical procedure that costs $10,000 today will cost just under $21,000 in 25 years. Over thirty years – a typical retirement planning period – inflation can ruin a Boomer’s retirement plan.
How can you hedge against the risk of inflation? You won’t be able to do it with bank products like CDs, savings account or money market accounts. While those investments safe and secure, they won’t allow you to keep up with inflation.
The best way to do so is with investments that historically have provided returns higher than inflation. The most obvious of these is the stock market. Stock market investors have earned an average return that has far exceeded the rate of inflation. Yes, the stock market is risky, and the returns can fluctuate from year to year. But the reward Boomers get for accepting the risk is returns that are far greater than those safe investments we mentioned.
Boomers who need their investments to stay ahead of inflation need invest a prudent portion of their investments in the stock market. This will maintain your purchasing power over time and help ensure a secure retirement.
Taxes – Income & Distribution Planning
Taxes represents another threat to your long-term financial security. You’re taxed on your income from your IRAs, pensions, rental properties, part-time employment and even your Social Security. You’re also taxed on the dividends, interest and capital gains from your portfolio.
Taxes can significantly reduce your spendable income and the value of your investments. Of course, you must follow the Internal Revenue Code and pay your taxes. However, you should avoid taxes whenever legally possible. So, while we advise strongly against illegal tax evasion, we strongly encourage legal tax avoidance.
As you transition into retirement, you’ll encounter numerous income and tax planning opportunities. When should you begin taking Social Security? When should withdraw money from your retirement accounts? Should you convert funds from your traditional IRA to a Roth IRA? How can you minimize the Medicare Part B premiums you pay? Should you use your IRA to make gifts to charity?
Boomers can greatly enhance their retirement security through careful tax planning. Most Boomers don’t have the expertise to tackle complex tax planning issues. If you need help, consult a tax expert like a Certified Public Accountant (CPA), enrolled agent (EA) or licensed tax consultation (LTC). You may also wish to consult with a CERTIFIED FINANCIAL PLANNER™ who also carries the RICP® designation.
Investment Risk – Stress Test Your Plan
If you’re relying on your investments for income in retirement, you undoubtedly know that the stock market can be a risky place. The stock market can drop without warning, if investors become skittish or economic bad news emerges. If this happens at the wrong time, the results can be destructive. You can also suffer long periods of mediocre returns. As an example, the return of the S&P 500 index (which tracks large cap US stocks) for the 10-year period from 2000-09 was negative.
While you can’t totally eliminate investment risk from your retirement plan, you can plan for it. You can stress test the strength of your plan by modeling what would happen if the returns in your portfolio were low for an extended period of time, or even the entire length of your retirement. Economists and investment experts expect future returns to be less than they have been historically. So, make sure your plan “works” even with low returns.
You can also stress test your plan for bad timing or, more formally, “sequence of returns risk.” The idea is that it matters when bad returns occur. If they happen when you’re 90, you might not be happy about it, but it won’t change your life. However, if bad returns occur just as you’ve retired, that can be a problem. You may not be able to avoid selling investments that have lost a lot of value before those values have a chance to recover.
Most Boomers don’t know how to stress test their plans for low returns over an extended period, or for “bad timing.” If this is your situation, consider working with a CERTIFIED FINANCIAL PLANNER™ who does retirement planning and who uses software that can model these risks. You want to be sure, not just hope, that your plan will be secure even if you end up with poor investment results.
Because so few Boomers are entering retirement with a defined benefit pension plan, the vast majority of them will need to rely on Social Security and their own savings for income. If you’ve been saving in a qualified retirement plan like a 401(k), 403(b) or 457 plan, you’ll need to convert the contents into spendable dollars. Easier said than done.
Not so long ago, retirees could invest in low-risk bonds, CDs and conservative, dividend-paying stocks to generate income. That’s really no longer possible, because the yields on these investments simply are not high enough to produce sufficient income. Fortunately, there’s another way to create income from a portfolio.
Before we discuss how to generate retirement income from a portfolio in low-return environment, let’s consider how to build and manage a portfolio. Investing has been the subject of academic research for at least 100 years. The findings from this research should guide you as you build and manage your portfolio, or look for someone to do so for you. Let’s review the basics.
Risk and Return
It might seem obvious, but the reason investors buy risky investments is that they expect to be rewarded for doing so. The greater the risk, the greater the expected return. If you invest in bank products like a CD, you know it’s guaranteed by the government and you can’t lose your money. So, there’s essentially no risk of loss of principal to you. Consequently, your return is very low. Low risk, low return, it’s as simple as that.
However, if you invest in stocks in an emerging market like Brazil or India, the risk of loss is much greater. There’s no government guarantee. So, you’ll expect (and hopefully) receive a higher return.
In reality, the returns of risky investments are highly volatile. We measure the risk of an investment using a statistical concept called “standard deviation”- a measure of the extent to which an investment’s returns vary. In the case of emerging market stocks, the standard deviation is quite high. Because of this, investors in these stocks expect higher returns and, over a long period of time, they generally receive them.
Numerous studies have shown that the most important element of portfolio construction is asset allocation. Asset allocation is the process of apportioning your portfolio across various asset classes. An asset class, in turn, is simply a group of securities with similar risk, return and other investment characteristics. Examples of asset classes include US large company stocks, real estate investment trusts (REITS) and short-term, high-quality corporate bonds.
Proper asset allocation involves selecting the right asset classes for your portfolio, and investing the right amount in each. The more aggressive you wish to be, the more you’ll need to add risky investments to your portfolio. Your portfolio will have a higher standard deviation. But it will also have a higher expected return. Alternatively, if you wish to be conservative, you’ll add more conservative asset classes to your portfolio. The standard deviation will be lower and so too will be the expected return.
Let’s assume that you’ve selected the right asset classes in the proper amounts, given your unique circumstances as a Boomer in retirement. Now you need to make certain that you’re properly diversified within each of those asset classes.
The most effective way for most investors to diversify a portfolio across many asset classes is by investing in mutual funds or exchange-traded funds (called “ETFs”). Mutual funds and ETFs are attractive because they make it possible to invest in hundreds or thousands of securities through a single vehicle. As an example, the Vanguard Total Stock Market ETF (Ticker symbol VTI) invests in “large-, mid-, and small-cap stocks across both growth and value styles.” It would be impossible for an investor with less than tens of millions to invest to achieve the diversification offered by this one fund.
It’s also important to hold your investments in the “right” type of account whenever possible, taking into account tax characteristics. Let’s illustrate this idea with a scenario.
Let’s assume that you have $2 million to invest, as follows: $1.5 million in your IRA, $250,000 in your Roth IRA and $250,000 in your taxable brokerage account. You’ve found that a 50% stock and 50% bond portfolio is appropriate for your plan.
We know the dollars in your IRA won’t be taxed until they’re withdrawn, and then they’ll be taxed as ordinary income. The dollars in your Roth IRA won’t be taxed when they’re in the account, and can be withdrawn tax-free. The dollars in your brokerage account will be taxed based on the type of investments you own. Stock dividends, bond coupon payments and interest are generally taxed as current income. If you sell a position that has appreciated, the gain you realize will be subject to capital gains taxes.
Now, what’s the best way to allocate your $2 million? We know that $1 million (50% of $2 million) should be invested in bonds. So, we’ll put all of the bonds in your IRA. The bonds will generate current income, but that income won’t be taxed until you withdraw it from your IRA. We’ll invest the remaining $1 million in your IRA ($500,000), Roth IRA ($250,000) and brokerage account ($250,000).
How might we decide what to put in these three accounts? Let’s imagine that you wish to have $500,000 in US stocks, $400,000 in international stocks and $100,000 in emerging market stocks. You might put the emerging market stocks in your Roth IRA, because emerging market investments are volatile and require a long investment horizon. You’re also likely to take distributions from your Roth IRA later in life. So, the emerging market stocks might be well-placed in the Roth IRA. The remaining $900,000 in stocks would be placed in your IRA ($500,000), Roth IRA ($150,00) and brokerage account ($250,000).
Asset location matters, because it improves the tax-efficiency of your portfolio. The more tax-efficient your plan, the more secure your retirement.
Investing in Asset Classes
Now that your portfolio is proper allocated across a wide variety of asset classes, diversified within those asset classes, and the investments for each are in the right type of account, you’ll need to decide on the investments for each.
We discussed earlier the attractiveness of mutual funds and exchange-traded funds. However, there are literally thousands of funds and ETFs to choose from. So, let’s start by splitting the universe of choice into two groups: funds that are “actively managed” and funds that are “passively managed”. Active funds attempt to beat the performance of the market, an index or a benchmark. Passive funds simply seek to deliver the return of the market, an index or a benchmark.
Decades of research show that very few managers of active funds actually outperform their targets, much less so for a long period. When they do, it’s not clear whether that out-performance was due to luck or skill. Therefore, we’d encourage you to recognize the futility of active management and to use passive funds for your portfolio.
John Bogle, the legendary investor who founded the mutual fund company Vanguard, said that investors “keep what they don’t pay for.” This simple but wise insight reminds Boomers that they need to be cost-conscious investors.
There are several layers of expenses you typically incur as an investor. First, if you decide to work with an investment advisor, you’ll pay an investment management fee. Second, your accounts will be held at a custodian like Schwab or Fidelity, and the custodian will charge commissions for the buy/sell trades placed in your portfolio. Fortunately, those commissions are much lower now than they were just a few years ago. Third and finally, If your advisor uses mutual funds or ETFs to build your portfolio, you’ll pay an “internal expense” charged by the funds you own.
So, let’s say that you pay an investment management fee of 1%, that commissions are negligible, and that the internal expense ratio for a portfolio of mutual funds and ETFs averages 0.25%. If you invest $2 million, the annual fees will be $25,000. This would be pretty typical for a low-cost, passively-managed portfolio.
The Role of Your Advisor
Now you might be thinking, if I cut out the advisor, I can reduce my expenses by $20,000. This is true. But is it a good idea? Will you be able to do everything your advisor does, as well or better? Do you have the knowledge and skill to manage a portfolio? Do you have the time it takes? Will you enjoy the process? What will you do when, not if, the next market crash occurs?
The vast majority of Boomers who want a secure retirement should work with a professional investment advisor. While paying for such a service isn’t cheap, your advisor should pay for him or herself through investment performance, tax efficiency and cost control. In addition, you’ll almost certainly feel more relaxed knowing a professional is watching over your portfolio. You could argue that peace-of-mind is priceless.
When you transition to retirement, you’ll be making another major shift. You’ll go from saving for retirement to spending in retirement. It might seem like a simple thing. But you’ve probably been saving for retirement since you were in your 20s or 30s. Hopefully, you were disciplined about it and managed to accumulate a substantial nest egg. Now you’re spending, by drawing down on your savings.
While you were working, you earned an income. You paid your taxes, lived on a portion of your income, and save enough to retire comfortably. It was pretty simple.
In retirement, it’s more complicated. You probably have several sources of income. You may have a defined pension from one or more employers. You have Social Security. You probably have savings in an IRA, a Roth IRA and a brokerage account. You might have rental property income. You might even be working part-time.
How do you convert these resources into income for the rest of your life? Actually, a better question is: how to do you generate income from your resources in the most cost-effective and tax-efficient manner? The answer isn’t intuitive.
How Income is Taxed
Let’s review the how your possible sources of retirement income will be taxed.
The dollars inside an IRA aren’t taxed until they’re withdrawn. You’ll be required to take minimum distributions from your IRA starting at age 72.
The dollars inside a Roth IRA aren’t taxed unless they’re incorrectly withdrawn.
The dollars inside a brokerage account are taxed as income, interest or capital gains (when realized).
If you receive a defined benefit pension, that income will be taxed as ordinary income.
The income you receive from Social Security may be taxed.
If you have rental property income, it will be taxed, although there are tax benefits associated with real estate that may allow you to reduce these taxes.
If you work part-time, that income will be taxed as ordinary income.
The Conventional Approach to Generate Retirement Income
Now let’s consider how to utilize your resources. Let’s assume that, like most Boomers, you don’t have a (defined benefit) pension, you don’t have rental income, that you’re not working, and that Social Security alone isn’t enough to meet your needs. This means that you’ll need to draw on your investments in your IRA, Roth IRA and brokerage account.
The conventional thinking around converting investments to retirement income would have you spend down your non-taxed accounts first, to delay as long as possible paying taxes on distributions from tax-deferred accounts. So, you might be inclined to withdraw from your Roth IRA early in retirement in order to delay distributions from your IRA until they’re required at age 72. Once you’d exhausted the Roth, you’d probably move on to your brokerage account and take distributions from it.
Retirement Income and Distribution Planning
The problem with this strategy is that while it may minimize taxes early in retirement, it’s highly tax-inefficient when viewed over your entire retirement horizon. A far better approach is to you’re your retirement income distributions every year. In this process, you’d assess your tax situation this year and project what you expect to happen next year. We usually do this for our clients in the fourth quarter of the year.
You’ll review what happened this year. Did you have unusually high medical expenses? Did you have large educational expenses, perhaps for a family member? Did you incur large investment losses? Did you make a large charitable contribution? Based on your answers to these questions, does it make sense to take withdrawals from your IRA? Should you convert some of your IRA to a Roth IRA? Can you sell positions in your brokerage account that have large embedded capital gains and offset them with other losses? What about your Medicare Part B premiums? Those are determined based on income from two years ago. (i.e. 2018 income for 2020 premiums). Are you not yet Medicare eligible and instead getting your health insurance through the Affordable Care Act and the Health Insurance Marketplace? If so, are you concerned about qualifying for a premium tax credit?
Now let’s think about income for next year. How much will you need in spendable dollars? How much of that will come from Social Security? How much has to come from your other buckets (i.e. IRA, Roth IRA and brokerage account)? Do you expect any of the previously mentioned circumstances next year (i.e. large medical bills, educational bills, investment losses, charitable gifts)? Will there be a change in the tax laws in the next few years?
Other Income Strategies
What can you do if you don’t have a pension, but want more guaranteed income? You could convert a portion of your retirement savings into an income-paying annuity. There are a variety of ways to do this, but the simplest and most common is an immediate annuity which pays guaranteed income to you (and possibly your spouse) for as long as you live.
What if you find yourself with dwindling savings and a debt-free home? Many Boomers in the Bay Area in California find themselves in this situation. If you do, too, you should consider accessing the equity in your home through a home equity conversion mortgage (called a HECM, or a reverse mortgage).
We’ve reviewed a wide variety of issues related to income and tax planning. Retirement income planning is complex, so some of the issues may be unfamiliar. If you need help, be sure to consult with a CERTIFIED FINANCIAL PLANNER™ (CFP®) and a tax professional. Look for a CFP® with the RICP® credential and look for a tax professional who does sophisticated tax planning for retirees. Smart income and tax planning are vital to a secure retirement.
Boomers have transformed the nation unlike any previous generation. This generation – born between 1946 and 1964, and nearly 79 million strong at its peak – changed America’s economy, culture, politics and even its religiosity. Now they’re entering and moving through retirement and they’ll surely change it as well.
Growing old is a privilege denied to many, and this has been the case in the Boomer generation, too. However, the journey of life does eventually come to an end for everyone. That’s a given. What’s not a given is the degree to which we’re prepared to grow old and eventually pass on. Let’s consider what every Boomer needs to do to ensure that their final years are lived with dignity.
Planning for Incompetency
As people live longer, they’re more likely to reach a point at which they’re no longer able to make sound decisions. This may affect their ability to manage their finances, live independently, care for themselves and guard against those wish to exploit them. When a person is deemed unable to manage their affairs due to mental deficiency or physical disability, the person has become “incompetent.”
No one wants to become incompetent. But it’s happening with growing frequency to older Boomers due to cognitive impairment caused by Parkinson’s disease, Alzheimer’s disease, Lew body dementia and other forms of illness. The risk of impairment grows with age.
If you were to become incapacitated and unable to make decisions about your medical care, what would you want done? Do you wish every effort be made to keep you alive? Do you wish to have a feeding tube, if necessary, to sustain you? Do you wish to have breathing respirator, if you can’t breathe on your own?
A living will (also known as an advanced health directive) is a written, legal document that expresses your preferences for medical care, if you’re unable to make or communicate these decisions for yourself. You should give your spouse, personal representative, personal physician and caregivers a copy of your living will. If you’re seriously injured, terminally ill or cognitively impaired, your wishes for care will be clear.
There’s another reason why every Boomer should have a living will. Your advanced directive will take the burden of making decisions about your care off of family members and/or close personal friends who may be looking after you.
Health Care Power of Attorney
There may be health care-related circumstances which aren’t addressed by your living will (or advanced health directive). If decisions about your medical care need to be made, you’re unable to make them and they’re not already addressed in your living will, who will make them?
You (as “principal”) can identify someone to act on your behalf (your “agent” and also known as a proxy, surrogate, representative, or attorney-in-fact) through a health care power of attorney. In this document you can identify two (or more, but not fewer) doctors who you trust and who specialize in diagnosing cognitive impairments to legally certify your incompetence. Once you’re deemed incompetent to make your own health care decisions, your agent or representative will be granted a health care of power attorney to make medical decisions for you.
Having a health care power of attorney prepared and ready allows you to avoid the costly, public and potentially embarrassing prospect of being taken to court and declared incompetent.
To whom should you grant a health care power of attorney? Someone you trust, who knows you and who’s capable of making health care-related decisions that are consistent with your preferences and wishes. It would be a plus to name a person who has some background in medicine and health care.
Many states recognize a process and a form for end-of-life care called a “Physician’s Orders for Life-Sustaining Treatment”, or POLST. You can learn more on the National POLST website and find what your state has in place. In general, the POLST form is meant for those who are seriously ill or have advanced frailty. It’s completed and signed by your physician after a review of your medical condition and treatment options.
Financial Power of Attorney
What if you’re unable to make decisions about the financial aspects of your life? A durable financial power of attorney allows you (again, as principal) to name an agent (or attorney-in-fact) to make decisions about financial and legal matters on your behalf. Because this power is durable, it will remain intact even if you become incapacitated.
You could grant the same person a power of attorney for health care and a durable power of attorney for finances. But it might be wise to select different people for these roles, based on your preference and their capabilities.
You should select a financial agent who you trust to make wise financial decisions that are in your best interests and consistent with your values and preferences. You might select a financial agent who has a background in finance, accounting or law.
Revocable (Living) Trust
What do you want to happen to your assets after you die? Are your intentions written down in a legally enforceable document? Who will make sure your wishes are carried out after you’re gone?
A trust is a legal entity that allows you as the trust maker (or grantor) to name a third party, called a trustee, to hold and direct assets on behalf of the trust’s beneficiaries. A revocable trust is a trust that can be changed by you, the trust maker, as long as you’re alive.
Assuming you’re still capable of managing your financial affairs, you would most likely name yourself as trustee of your revocable trust. You would transfer title of your assets (real estate, investments, bank accounts, and other valuable possessions) into your living trust. During your life and at any time, you can make changes to your trust and/or cancel provisions of the trust.
You’d name a successor trustee in the trust document. If you’re no longer able to serve as trustee of your revocable trust due to incapacity or death, your successor trustee will take over the administration of your trust. Your successor trustee will be responsible for managing your assets for your benefit while you’re alive.
Your revocable trust document will include named beneficiaries. After you’ve passed, your successor trustee will ensure that your wishes for the distribution of your assets to your named beneficiaries are followed.
What happens if you somehow forgot to transfer important assets into your revocable living trust? It happens frequently. The solution is a “pour over-will,” which is a legal document that ensures that these overlooked assets are properly transferred to your trust.
You, as “testator,” draft your pour-over will. When you die, your trust will distribute assets in the trust to the named beneficiaries. Your “pour-over will” transfers the assets you overlooked to your trust. Once in the trust, these assets can be properly distributed.
If you’ve taken all of the steps described above, you should be able to avoid a legal process called probate. If you were to die with just a basic will or with no will at all (i.e. intestate), your estate would be administered entirely through the probate process.
For an estate with a will, the probate court will appoint an executor named in the will. The executor will be responsible for identifying and gathering the assets and liabilities of the estate. The executor will pay any debts and distribute the remaining assets to the named beneficiaries.
If there’s no will, the probate court will name an administrator for the estate. The court will determine through state intestacy laws how the estate’s property is to be distributed.
Probate is a slow, clumsy, public and often expensive process. Through proper estate planning, you can avoid it.
Digital assets are resources you own that are stored electronically on a device or in the “cloud”. Digital assets include photos, music, digital currency, and electronic documents. They also include the “keys” to your accounts, your social media profiles (like Facebook, Instagram, LinkedIn, and so on). Digital assets are typically accessed with a user name or ID and a password or PIN. Some may require additional authentication.
Some of these digital assets can have great economic and/or sentimental value.
What will happen to your digital assets after you’re gone?
Your estate plan should include an inventory of your digital assets and it should be stored securely. Make certain that your estate planning attorney and agent (acting as your power of attorney) know how to access it.
The Complete Boomer Estate Plan
So, to review, you should execute a living will (advanced heath directive), grant powers of attorney to agents for health care and finances, and create a revocable living trust with a pour-over will. Your estate plan should also include an inventory for your digital assets.