Having met with thousands of individuals during the 25 plus years of my career, I have noticed most people tend to make similar mistakes. These mistakes can really hurt a financial plan tomorrow if they are not addressed today.
This article will address some of the areas of your financial life where you might be “flirtin’ with disaster” and don’t even know it.
(or worse yet, Non-Existent)
In my opinion, everyone should have a minimum number of legal documents in place. Additionally, those documents need to be routinely reviewed and updated as necessary. Once a document is in place, you still need to consider life changes that may affect it. Did you move from one state to another? Did one or more of your beneficiaries die or are you still in relationship with them? These are only two of the many questions that need to be addressed at least annually.
The following documents are the minimum which every person should have:
- A financial power of attorney. In this document you name a person whom you trust to act on your behalf should you become incapacitated. Let’s say you are a married person and you are in a car accident and cannot act for yourself. Most of your money is in an IRA or 401k and your spouse needs funding to keep the household going while you are out of commission. Your spouse will not be able to access those accounts unless you have them listed as your financial power of attorney because they are in your name. Without this document, your spouse will have to go to court to obtain alternate legal documents that would allow access to your account(s). This takes patience and time. In the meantime, how is your spouse supposed to keep the household going?
- A health power of attorney. This is a document you put in place for someone you trust to make health decisions for you when you can’t. Do you remember the case of Terri Schiavo in Florida? Terri was a severely brain-damaged woman whose condition sparked an epic legal, medical and political battle that gripped America. She was diagnosed as being in a persistent vegetative state for well over 10 years, part of which her husband and parents were engaged in a legal battle of whether to remove her nourishment and hydration. Ultimately, the courts ordered her feeding tube be removed and she died 13 days later. In this situation, a health POA would have been able to make the decision without involving the courts.
It is easy to forget to update your beneficiary designations. Accounts such as IRA’s, life insurance, annuities and even banking should all have a designated beneficiary. Beneficiary designations override your will, so be sure they’re up to date and accurate. There was an article written in the New York Post on 1/31/05 with the headline “BROKE WIDOWER LOSES ONE MILLION TO IN-LAW”. If you read this article you will find that the wife never updated her beneficiary when she married; so, her sister inherited her money instead of her husband.
If most of your investments are in a tax-deferred account like an IRA or 401k, you could be building a time bomb for yourself. Let’s say you have been putting funds into a 401k for your whole career and you now have 1 million dollars saved. If you were to request to withdraw these funds from the investment company, do you think you will be able to keep the whole million? No, you won’t! Remember Uncle Sam is also a partner in your account and about 40% to 50% will go towards state and federal taxes. To avoid this type of tax time bomb, do not put all your money in tax deferred accounts.
Too many people ignore the long-term care piece of their retirement puzzle. Some people are just too busy and adopt a “I’ll figure it out later” attitude. Others just want to avoid the subject altogether and end up procrastinating indefinitely. Think about LTC like this: you have worked for 40 years and have accumulated $750,000; then one day you have a stroke and need to go into the dreaded nursing home. At a cost of around $70,000 to $100,000 per year, how long before your nest egg is depleted? It will be gone sooner than you think. And remember you are not the only person to worry about. This creates huge stress for family members. The answer is to plan now not later.
For years, the 60/40 portfolio has been the approach recommended for many retirees. This portfolio is generally 60% large cap stocks and 40% bonds. But in the current investing environment, this can be a terrible idea if you are already retired or retiring soon. If you think a 60/40 portfolio will protect you from future volatility in the markets, you’re fooling yourself.
A better plan is to focus on investments like annuities and dividend paying stocks so that when, not if, the market goes down, your income keeps coming in.
Mickey Owen was a four-time All-Star in 13 major league seasons over a 17-year span. In 1942, he was the first player to hit a pinch-hit homer in an All-Star game. In 1941, Owen had a team record of .995 fielding percentage and a National League record for catchers with 476 consecutive chances without an error. Sadly, these stats are not what people remember about Mickey. They remember that he was the one whose infamous dropped third strike proved costly to the Brooklyn Dodgers in the 1941 World Series against the New York Yankees.
Brooklyn had a 4-3 lead in Game 4 when Owen dropped a third strike on Tommy Henrich that would have been the final out. The Yankees went on to score four more runs after the dropped ball and won the game 7-4 for a 3-1 lead in the World Series that they eventually won in five games. "I don't mind being the goat," Owen said later. "I'm just sorry for what I cost the other guys."
The moral of this story is to not be remembered after you are gone for dropping the ball. Plan for your future and for your heirs. I once had a class where we discussed Owen’s story and one of the students said to her mother, “Please don’t leave a mess for me like grandma did for you”.
If you are confused or “flirtin’ with disaster” with your own financial plan and don’t know where to start; then just give our office a call. We are more than happy to help and to serve you in any way we can.