Retirement planning can be a complicated process. When you have a unique situation, it only makes planning for retirement all the more confusing because most conventional wisdom no longer applies to you. If you’re a widow or divorcee, for instance, the retirement advice propagated for couples won’t do you much good. Likewise, small business owners have different retirement plan options than people who work for a traditional employer.
If you find yourself in a unique situation, don’t let it derail your retirement plan. Instead, it’s important to work with a financial advisor who works with clients like you and is familiar with concerns specific to you and your situation. Whether you’re a widow or divorcee, the recipient of sudden wealth, the owner a small business or are trying to multitask by estate planning while retirement planning, we’ve got you covered.
The first thing to do following the death of your spouse is to pause. You’re no doubt in the midst of an emotional upheaval. The last thing you want to do while feeling emotionally overwhelmed is take on tough financial decisions.
When you feel more emotionally grounded, it’s time to evaluate your new financial situation. Start by ensuring you have what you need to cover your day-to-day expenses. Make sure you know where all of your financial accounts are – new and old – and which ones are designated for short-term expenses versus long-term ones.
You may have inherited new accounts from your spouse, such as an Individual Retirement Account (IRA) or 401(k). As a spousal inheritor, you have the option of combining these assets with your own retirement savings or keeping them separate. If you’re unsure which is best, consult with a financial advisor who can guide you.
You may also want to look into the steps to claiming any death benefits from life insurance. While you’re looking into life insurance, now is a good time to make sure your own policies are in order. You may need to update your beneficiaries on both life insurance policies and financial accounts.
All of this may sound overwhelming, but there are people and resources here to help. This is a good time to build a team of professionals who can support you financially while your family supports you emotionally. In addition to a financial advisor, you may need someone who specializes in trust law, an accountant, an estate planner and an insurance agent.
The important thing when handling your finances after divorce is to not sign anything too quickly. You’ve just gotten out of one big commitment; don’t rush into another. You shouldn’t commit to any new financial contracts until you’re clear how your divorce will shake out financially.
After your divorce, start by evaluating your new financial situation. You may have more assets post-divorce, like a house or half of your former-spouse’s retirement accounts, or you may have come away with fewer assets. Sometimes you get new assets that are also liabilities, such as a house, which can be a major expense if the mortgage is not paid off. How have your expenses changed as a result of your divorce?
Once you have a clear understanding of your new financial situation, revisit your financial goals. Even if your goals haven’t changed, your financial plan for reaching them may need to. Depending on your new assets and liabilities, you may need to adjust how you save and invest, or even the time horizon for major goals like retirement. If you have more assets after your divorce, you may be able to shift to a more conservative retirement investment strategy or retire sooner. Alternatively, if you have fewer assets or more current expenses, you may need to postpone retirement.
Finding yourself with a sudden wealth windfall can be a boon to your retirement planning but if not managed properly, it can also derail even the best-laid plans. Perhaps more important than what to do after a financial windfall, is knowing what not to do.
Don’t make any drastic changes right away, such as quitting your job, making a big purchase or taking on a major project. Instead, create a financial plan for your new wealth. You might start by speaking with a financial advisor who can walk you through the tax implications of your windfall. Then plan for how you’ll receive the wealth. If it’ll be in the form of investments, you’ll need a brokerage account to house it. If it’s coming as cash, you may want to keep it in a separate account from your bank account – possibly one without check writing ability so you aren’t tempted to spend it too quickly.
Next, take a look at your debt situation. If you have any high interest debt, such as outstanding credit card balances, a sudden windfall can be a great opportunity to pay it off. After that, consider putting as much as you can toward your retirement savings. If you have an employer-sponsored retirement plan, increase your contributions and use some of your new money to cover your current living expenses. You can also use your sudden wealth to max out your IRA. And remember, this isn’t a one-time deal: If you have more money left over after this year’s contributions, consider earmarking some of it for future retirement contributions.
Small Business Owners
Small business owners have a few unique retirement plan options: A self-employed 401(k), a SEP IRA or a SIMPLE IRA. Each offers tax-deferred growth and the ability to contribute pre-tax money, but there are also specific limitations to each plan.
The two primary questions to ask yourself as you choose between these plans are if you have employees who are not partial owners of the business and if so, would you like for these employees to be able to contribute to the plan?
A self-employed 401(k), sometimes called an Individual 401(k), provides the highest contribution limits, but is only suitable for small business owners with no employees other than your spouse or any business partners and their spouses. If you have no plans to add employees in the near future, a self-employed 401(k) is easy to set up and allows you to contribute up to 25 percent of eligible compensation up to $56,000 in 2019.
A SEP IRA allows small business owners with any number of employees to make tax-deductible contributions on behalf of their employees. You can contribute up to 25 percent of eligible employee compensation up to $56,000 in 2019, but must contribute the same percentage to each employee’s account.
A SIMPLE IRA is designed for small business owners with no more than 100 employees. You and your employees can both make pre-tax (or tax-deductible, in the case of the employer) contributions. Employees are eligible to contribute if you paid them at least $5,000 in the preceding two pay periods. They can contribute up to $13,000 in 2019. As the employer, your business is required to either match 100 percent of the first 3 percent of your employee’s contributions or make a 2 percent non-elective contribution on behalf of all employees.
You should also be aware that self-employed 401(k)s and SEP IRAs are free to set up but SIMPLE IRAs often have a plan fee.
As you near retirement, it’s a good time to incorporate an estate plan into your retirement planning. Take some time to think about how you’d like to pass your assets onto your beneficiaries after you’ve gone.
Start with a will. It doesn’t need to be elaborate, but without a will, your beneficiaries will have to endure the often complicated and frustrating probate process. To simplify matters for your loved ones and beneficiaries, keep an updated will and list of all your financial account information. This way they will know where everything is and to whom you wished it to go.
While you’re preparing your list of financial information, take a moment to double check your beneficiaries on each account to make sure they still reflect your current wishes. If you have a retirement plan or IRA and are married, consider making your spouse your beneficiary. Spouses have more flexibility when inheriting retirement assets than non-spouse beneficiaries.
If taxes are a concern for your beneficiaries, you might want to convert some of your traditional retirement assets to a Roth IRA. In addition to saving your beneficiaries taxes when they withdraw, any taxes you pay when converting to a Roth are removed from your estate’s value, so your beneficiaries may face fewer estate taxes as well.
Finding an Advisor Who Can Help
Retirement planning can be confusing for everyone; if you have a unique situation, the planning only gets more intricate. Luckily, there are resources to help.
Hopefully now you have a clearer understanding of how to plan for retirement regardless of any unique situation you may have. That understanding may come with new questions, though, and that’s OK. The best way to learn is knowing the right questions to ask. Then you can find the right person to ask those questions.
A retirement planning specialist can be a great resource to you as you prepare for and enter retirement. These professionals help you build a personalized retirement plan to fit your unique situation. Ultimately, your retirement plan should be as individualized as you are.
Align Wealth Partners works with individuals in all kinds of situations, and very commonly with widows, divorces, small business owners, petrochemical employees and individuals who find themselves with sudden wealth. If you’re looking for a financial advisor to assist you with your financial planning, contact us to see how we can help.