Estate Planning: Build Up, Draw Down, Distribute Balance
By: Dan Rosenberg
You’ve worked hard to build your savings and want to protect them not only for yourself, but also for your heirs and community after you’re gone. Though you might think of estate planning as something for the wealthy, you don’t have to have millions of dollars to consider passing along your assets—including personal property, real estate, and finances. It’s part of a solid financial plan for almost any investor.
What you might not have considered, however, is that a smart estate plan can help you manage your retirement so you can draw down regular income from your savings, as well as leave a legacy. There is an overlap between retirement planning and estate planning, and if you’re approaching or already in retirement, it’s important to consider both and how they relate.
One aspect to estate planning is figuring out how to avoid outliving your estate, along with having enough assets left over for any heirs. These goals mean understanding how you can set up your plan for income and protection. This is where retirement planning and estate planning begin to converge.
“Think about estate planning as passing assets on to the next generation, which is different from retirement planning,” said Matt Sadowsky, Director of Retirement and Annuities, TD Ameritrade. “But there’s an overlap. If you’re drawing down your assets too quickly, there might not be enough to pass on to your beneficiaries.”
One widely referenced strategy for drawing down your assets is the 4 Percent Rule, which says you can withdraw 4 percent of your retirement savings in your first year of retirement, and increase that percentage each year to adjust for inflation. Some financial experts recommend using it as a rough guide, but tweaking it to your own circumstances. Others suggest a bucket approach, which involves holding several buckets of money, or separate asset accounts, each covering a different time segment of your retirement.
When you plan your drawdown strategy, consider how long you expect to live, especially if you hope to have assets left for your heirs or community. The 4 percent rule is generally considered the right guide for a 30-year time horizon, so if you’re in your 60s, that might be realistic. However, don’t assume you’ll only live as long as the median life expectancy for your sex and age group, because you might end up outliving your money, or not having a legacy to leave behind.
“It’s more about planning for the possibility of living a long time and beyond the median life expectancy,” Sadowsky said. “Don’t plan for the median life expectancy of 82. Plan for what happens if you live longer than half the population.” That could mean being more conservative with your spending in retirement, especially if you have beneficiaries in mind.
Estate Planning Basics
An estate plan, in its most basic form, is simply a set of documents containing all of your plans, directives, bequests, and other information you’d like to pass on to those you leave behind.
When setting an estate plan, many choose to begin with a will, which will direct how your assets should be distributed, and if you still have dependent children, the will is where you can set up instructions for how they’re to be taken care of.
Depending on the size and contents of your estate, you may also wish to place assets into a trust, which explains how your assets will be managed and distributed upon your death. A trust also allows you to designate someone to manage your assets during your lifetime if you become incapacitated, as well as deal with any special considerations your heirs might have.
Consider what’s most important to you as you make your estate plan. Then do the research. For instance, perhaps you want your estate plan to help fund the college expenses of your children or grandchildren. If so, learn the basics of 529s and other college saving plans.
And if you have a favorite charity to which you’d like to bequeath a portion of your estate, you might wish to learn about charitable remainder trusts, which can be set up to protect your loved ones for a certain amount of time, and then donate the remaining portion, or a portion of your choosing, to a charity.
Estate Planning Considerations
Of course, deciding who gets what isn’t an easy process, especially if there are extenuating circumstances. There are methods, however, to help you manage your assets after you’re gone, and in the manner you wish.
“If there’s a beneficiary you’re worried about giving a lump sum to and having them act irresponsibly, either because of diminished capacity or maturity, creating a recurring stream of income that you stipulate based on the contract is like a fixed stipend or allowance that can’t be changed by the beneficiary,” Sadowsky said.
Another thing to consider is life insurance, which can also be part of an estate plan that passes along funds to the next generation. Life insurance avoids probate, or proving of the will, meaning funds in life insurance aren’t subject to any court fees associated with the probate process.
Discuss Your Plan
After you’ve worked with professionals to develop your plan, remember that the next step is making sure the plan is transparent and you’ve discussed it with your children, significant other, or whomever else might be managing or gaining access to your possessions and assets.
Failure to have these sometimes difficult, but very necessary, conversations could cause confusion or tension between your heirs when it comes time for your wishes to be carried out. Ensuring you have a clear plan that spells out your wishes can be an empowering and confidence-boosting opportunity. It could also help protect your assets from being subject to court costs.
From another angle, if you’re a younger or middle-aged investor, it might be a good idea to check with your own parents about their estate plans. There’s always a chance that they might have neglected to make a plan, and you, as their child, can encourage them to do so. Again, this might seem like a difficult or unpleasant topic to broach, but it’s important to have these conversations to avoid future confusion.
It all might seem like a lot to consider. But by putting your cards on the table, building a solid estate plan, and having those conversations with your beneficiaries and perhaps a trusted financial consultant, you can help ensure your beneficiaries get the most from your legacy.
The information is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.