A successful retirement plan incorporates a number of factors, from your investment accounts and your life insurance to your estate plan. However, retirement planning as a whole is an uncertain endeavor, as by definition it involves numerous variables.
The length of your life, your investment performance and your health are just some of the unknowns that must be accounted for in a retirement plan. That’s why it’s important to try to build in a buffer to your retirement projections and err on the side of being overprepared.
To help keep you on track, here’s a look at some of the most common life changes that will require you to update or re-examine your retirement plan. While you won’t likely experience all of them, you’re nearly certain to be affected by at least a few.
Marriage (or Divorce)
Probably the biggest single life change when it comes to modifying your retirement plan is if you get married or divorced.
If you get married, you’ll want to make sure you confirm in writing that your new spouse is the beneficiary of your retirement accounts. While in many states your spouse will become your beneficiary by law, having this declared in writing can help skip probate or any challenges to your estate. If for some reason you intend to disinherit your spouse, you may need your spouse’s permission in writing. You’ll also want to plan out your investments considering your new spouse’s portfolio, as well.
After a divorce, you likely want to remove your ex-spouse as a beneficiary of your financial accounts. If for some reason you don’t, you’ll want to note that in writing. You’ll also want to make sure that your ex-spouse is removed from any joint accounts, life insurance policies or other estate planning documents — again, unless you have a compelling reason to do otherwise.
When you have kids, you’ll want to include them in your estate planning documents as soon as possible. For example, if you have a trust, you’ll want to get their names listed as future beneficiaries and/or trustees of your accounts.
You may also want to specify in writing if particular children receive specific bequests after you die.
Major Change in Financial Status
Any time your financial status changes significantly, you’ll want to re-examine your retirement plan. For example, If you’re encountering long-term financial difficulty, you might consider taking a hardship withdrawal from your 401(k) or IRA. While this should be an option of last resort, a premature retirement plan withdrawal may make sense if it beats an alternative, such as going bankrupt.
As all of these financial choices have major ramifications, however, you’ll want to speak with a tax expert and/or financial advisor if you find yourself in this position.
If, on the contrary, your financial status has suddenly improved dramatically, it’s another good time to take a look at your retirement investments. If you suddenly have ample cash reserves to handle any financial setbacks, you may want to amp up the risk level of your investment portfolios. Or, depending on your own personal risk tolerance and investment objectives, you may want to downshift to a portfolio built for capital preservation.
Falling into wealth is also a sign that you should protect it via legal documents like trusts and umbrella insurance policies. This is another time you really should be speaking with a financial advisor.
Significant Health Changes
Significant changes in your health may require a review of your retirement plan. If your health has deteriorated to the point that you’ll need to start living off your retirement account, you’ll likely want to reduce the risk in your portfolio. Conversely, if you’ve overcome an ailment and anticipate living much longer, you may consider investments with a longer-term objective in your account.
Health changes might also call for the drafting of certain end-of-life estate documents, such as a living will or a healthcare power of attorney.
Poorly Allocated Portfolio
Major life changes are a reason to re-examine your retirement plan, but so too is a retirement account that’s underperforming. Imagine you’re planning on a 30-year retirement and you anticipate 6% annual investment returns until you retire. If you only earn a 4% return, you’ll fall well short of your goals. In fact, you may only be able to fund a 10-year retirement.
Although you can never guarantee investment returns, you might have to either take on more risk or make better investment choices in your portfolio if you want to reach your retirement goals. This is another example of where a financial advisor can be an excellent resource.
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