Over the past 25 years, my wife, 47, and I, 46, have both held professional careers, making well above the average income. Our home, purchased in 1998 for $84,000, and after $50,000 plus of upgrades and additions, is valued at $185,000. We have invested our money, maxing out 401(k)s and IRAs (including Roth IRAs) when we could.
We have made investing mistakes, but learned from them. We have over $1 million in investments for ourselves, an additional $50,000 in investments for our two girls to be used for college.
We have made investing mistakes, but we have learned from them. All told, we currently have over $1 million in investments for ourselves, an additional $50,000 in investments (529s and a Scottrade AMTD, -24.97% custodial account) for our two girls to be used for college, with our only debt being the final few years of our mortgage. We have never had credit-card debt. I will also point out we both started with nothing — literally.
So far, you may not think we have a problem. But we do. I spend a lot of my waking hours worrying. In 2017, as we approached the $1 million dollar milestone, the realization that our retirement is only nine years away (when I turn 55 in 2027) really hit me. I will point out now that we amassed our savings all on our own, without an adviser.
I anticipate to have $2 million. How do we handle that legacy? What vehicle can we use, such as a trust, to ensure that money lasts not just with our kids, but multiple generations?
Here is our problem: By the time we retire in early 2027, we should have about $2 million in investments. We plan on living conservatively as we do now, with the majority of our time spent traveling. I anticipate that we will live on less than our accounts make, and that $2 million will grow even more.
Without throwing out what I think that number might be at the end of our life, my point is how do we handle that legacy? What vehicle can we use, such as a trust, to ensure that money lasts not just with our kids, but multiple generations? How do we handle estate planning with emphasis on reducing or forgoing death taxes?
Dear Next Steps,
You have lived within your means and even managed to buy a home before the property bubble — not an altogether common feat for someone in their mid-40s. Not only have you invested wisely and across a variety of products, you are now thinking about how you can make this $1 million or $2 million work … for other people. And not just your own children, but your children’s children. Bravo!
Delaying retirement for just three to six months does to the standard of living after retiring what an entire percentage point of 30 years of earnings would do.
Of course, you should also give yourself a break and not lie away worrying when you have done so much and worked so hard. But that’s where the Moneyist comes in. If you don’t have to work beyond 57 and you want to travel the world, fine. But be aware that the later you retire, the higher your benefits will be. (Social Security benefits are lower if you retire before your full retirement age.)
Delaying retirement for just three to six months can have a big effect, raising the standard of living after you retire to the same degree that an entire percentage point of 30 years of earnings would, according to a recent report from researchers at Stanford University, George Mason University, Cornerstone Research and Financial Engines. “The relative power of saving more is even lower if the decision to increase saving is made later in the work life,” it says.
An irrevocable trust is one option, but you should consult a financial adviser on the tax implications, which may vary from state to state. Here is a checklist for you to consider. In 2019, the unified federal gift and estate tax exemption is $11.4 million or $22.8 million for a married couple, so you don’t have to worry about that unless you have a really lucky break.
“Tax laws change all the time and an estate plan should be reviewed every five years or so to make sure it is still efficient and effective in transferring assets to the next generations,” says Jim Todd, a client adviser with Mercer Advisors in Boulder, Col. “A complete estate plan package should also include documents such as powers of attorney, HIPAA authorization and medical directives.”
You should also be cognizant of how a deterioration in your health and/or an unexpected life event, such as an accident, could suddenly change everything.
“A trust set up in your will or living trust is called a testamentary trust. It is irrevocable upon your death,” he adds. “The children will have to abide by its terms so care must be taken to allow them some flexibility, but not so flexible that they have unlimited access to the trust funds, if the parents’ main goal is to make the funds last several generations.” It could last for many decades.
You should also be cognizant of how a deterioration in your health and/or an unexpected life event, such as an accident, could suddenly change everything, as could a dip in the stock market after a nine-year bull market. (Premiums for Medicare are also changing.) They also recommend financial education for your children and long-term care insurance for you and your wife.
I hope this helps. You need a road map, some advice and a full night’s sleep.
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