Do you have enough money? For women, this question is particularly important
by Patricia Annino, Esq.“Do I have enough money?”
That’s the first question I am asked by every widow, recent divorcee and woman on the verge of retirement. In reality, however, it is far better to ask the money questions long before you are widowed, divorced or ready to retire.
Just as estate planning is designed to preserve your wealth by helping you avoid taxes wherever possible, it is also designed to help you create enough wealth to keep you and your loved ones financially secure. We all know the numbers – women will outlive men on average by seven and one half years. Many women will inherit twice – once from their parents and once from their husbands. What steps can you take now to be prepared?
Gather the Facts: Understand your finances now. To plan you must know what the facts are. Gather your financial information and compile it two different ways. First, pull together a listing of your assets – list each asset, how it is titled (in your name, jointly, in your husband’s name, in a trust) and its approximate value.
List your real estate, investments, retirement plan, annuities, I.R.A.s, business interests, valuable artwork and personal effects and life insurance. Make sure you also list any debt –such as mortgage, home equity loan, installment loans. Second, pull together a listing of your income – your salary, your husband’s salary, investment income (whether you use it in your lifestyle or you reinvest it), passive income (from rental real estate or other investments) and understand your expenses – the regular fixed monthly expenses (mortgage, rent, real estate taxes, utilities, insurance), your lifestyle expenses (travel, entertainment, style and beauty) and your anticipated expenses (such as tuition or long term care needs).
Understand the facts and understand your risk: Analyze your financial information. When you have all of that information gathered really take a cold, hard look at it – are there any surprises? Should you anticipate any surprises? What if your husband died? Would your lifestyle remain as is? Would your income be sufficient to cover your expenses and your lifestyle?
Do you need to create wealth in the short term? On average one million dollars, when prudently invested will generate about $50,000 of income. You will need three million dollars of life insurance to replace a shortfall of $150,000 in annual income.
When you are in the wealth building phase life insurance can be purchased so that if something happened before your assets build up wealth is available for the family. If you are older and insurance is not a good option are you spending too much money?
Will your investments hold their value and sustain you through the duration of your lifetime? Should you make adjustments?
There are all kinds of models and computer simulations available today to provide an answer. With the help of computerized mathematical tools, for example, a financial planner can program in your current and projected financial needs, your investment portfolio, and hundreds or thousands of market-condition scenarios to determine whether your investments will last throughout your expected lifetime.
In the Monte Carlo simulation - one of the most popular – if your portfolio is run through 10,000 projected retirement scenarios and it shows it is sufficient 8,000 times, that means there is an 80 percent probability that your current portfolio will not run out of money. Then you must decide what your tolerance for risk is – how low the probability of running out of money must be in order to make you feel comfortable.
What if your husband died today, you are 50 years old and you need $10,000 a month to live on until you reach 85. Let’s also forget any pension plan benefits you might get. Ditto for Social Security. Let’s assume that you can earn 7% on your investments (7% net after tax is a very high number, by the way) and that you want your income to keep pace with an assumed inflation rate of 3%.
You would need to invest $2,363,990 to accomplish this goal. If you wanted to have the income stream last to age 95, instead of age 85, you would need $2,815,139. Although most people think they will spend less if their spouse dies I have never seen that to be true – when crisis strikes expenses mount. Travel increases – spending the holidays at home that first year may be too painful. Counseling bills are important. The desire to work decreases. One time expenses of administering the estate occur. Understand where the financial vulnerabilities are and work to solve them.
Do you know you would need if your husband became permanently disabled? Sadly, you would need MORE than if he died, because in addition to your normal expenses there would be his medical bills and other costs associated with his disability. Group disability insurance might be available from his employer. Individual coverage is also available, and you should get three proposals from three unrelated agents before making a decision. Tell the agent you want to get quotes only from companies with a “Comdex” rating of at least 90.
How will your children be supported if something happens to you and your husband? Life insurance on your life or if you are married, on your life and your husband’s life,, owned by a trust for the benefit of your children, is the best way to cover this need.
Since the children will not need the money forever, just until they reach their early twenties, a much smaller investment amount is needed. In order to provide $5,000 a month for 15 years, using the same assumptions as above, you would need an investment of $698,690.
What happens to those child support payments if your divorced husband dies? A good divorce decree requires enough life insurance on your former husband to cover not only the alimony payments, but also the child support payments, should he die before his obligation is over. You should be the owner and beneficiary of this policy.
If your business partner dies will you lose the business? Yes, unless you have the ability to purchase the dead partner’s share of the business from his or her estate. The bomb-proof answer to this problem is a properly drafted buy-sell agreement funded with insurance - unless both partners have sufficient assets.
How can you make sure you will have enough to retire? The best advice is: by starting EARLY! Let’s say you need the same $10,000 per month, adjusted for inflation, to age 95, we have been talking about. Let’s also say you have zero saved for retirement and you are 40 years old and want to retire at 65. How much would you have to save for retirement each month between now and age 65? $5,619. Now let’s say you are 50. You need to save $10,685 per month to be able to retire! So, start early and be consistent.
Educate yourself. Often it is more difficult for women than it is for men to take charge of the family’s estate planning; to own this responsibility. In many marriages the husband is still more accustomed to making business decisions and dealing with advisors, attorneys, accountants, and financial planners. As a result, the wife may defer to her husband on estate planning….
Which is a shame because, since women are still outliving men by seven years, the probabilities are that she is the one who will either benefit or suffer from the estate planning decisions that are made. So the first order of business is: Educate yourself.
If you have done some planning already gather together the legal documents that have already been drafted – how old are they? Do they still make sense? If your husband predeceases you, who is in charge? What do you have access to? What are the restrictions? Do you know who the family advisors are (lawyer, accountant, insurance professional, financial planner, business advisor) and have you met them?
Start to Plan. It is important to start to take that first step and start to protect yourself and plan. That first step will be different for everyone – it may be having a discussion with your husband to review what you have already done, it may be setting up an appointment with a lawyer or financial planner to bring your documents current or it may be increasing your current life or disability insurance. The challenge is to start to plan when there is no need to do it. Take that important first step and start – the next step is always easier.
Patricia M. Annino chairs Prince, Lobel, Glovsky & Tye’s Estate Planning and Probate Group. She is a nationally recognized authority on estate planning and taxation, with 20 years of experience serving the estate planning needs of families, individuals, and owners of closely held businesses. A member of the firm’s Media and Intellectual Property Group, she represents authors, artists, and musicians in estate planning and probate matters.
She is the author of two widely utilized professional texts: Estate Planning in Massachusetts, part of West Publishing Company’s Massachusetts Practice Series; Taxwise Planning for Aging, Ill, or Incapacitated Clients, published by the American Institute of Certified Public Accountants; author of the Federal Gift Tax, A Practical Guide to Estate Planning in Massachusetts, published by MCLE and author of the published book, Women & Money, A Practical Guide to Estate Planning. Patricia has been quoted in the Wall Street Journal on the topic of Estate Planning, and is currently acting as the Estate Planning Consultant to the independent investment research provider, Morningstar. She has been quoted in the Dallas Morning News, the Chicago Tribune, Marketwatch, Investors.com, the Women’s Business Journal, and interviewed on Bloomberg Television.
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