As you settle into retirement, it’s natural to look at your finances and think about how much you want to leave behind. Even if your dream has been to leave an inheritance for your loved…
As you settle into retirement, it’s natural to look at your finances and think about how much you want to leave behind. Even if your dream has been to leave an inheritance for your loved ones, you may find your goals or financial situation change over time. “Retirement is a very personal adventure,” says Megan Gorman, managing partner at Chequers Financial Management in San Francisco. Depending on your family’s needs, as well as your own interests and health, you might decide to create a legacy, spend more on yourself than planned or both. Follow these guidelines to determine the best financial path for your resources in retirement.
Start with your own bills. Perhaps you have a solid grasp on what you spend during an average month in retirement, but it’s important to think ahead. “Account for living expenses both foreseen and unforeseen, such as major medical expenses that can occur later in life,” says Russ Weber, senior vice president of wealth management at UBS Financial Services in Hunt Valley, Maryland.
It is especially important to plan for a long retirement, given the trend of living longer. The average life expectancy for Americans in 2014 was 78.9 years, according to data from the Centers for Disease Control and Prevention. That’s a significant increase from past generations. In 1930, the average life expectancy for an American was 59.7 years, per CDC data.
If you live independently at home now, you might need to move to an assisted living facility or pay for nursing home care in the future. To gain an understanding of how potential costs might add up over time, visit a financial advisor to look at the numbers together. “Run long-term cash flow scenarios using various increases in spending patterns and inflation rates,” Gorman says.
Look at your financial plan. After thinking through your current and upcoming expenses, make sure you have a strategy in place to meet costs. “Lack of a solid financial plan is fraught with the risk of outliving your money, and as a result you will not be able to spend your nest egg and enjoy retirement or leave an inheritance to family or loved ones,” Weber says.
As you establish a plan or update your current one, think about regularly allocating a specific amount to yourself. “By setting aside a certain date each month, retirees can pay themselves with a retirement check,” says Ben Harvey, president and financial planner at Pathway Financial Planning in Connersville, Indiana. You can then use the check each month toward whatever activities or pursuits interest you.
Understand what “legacy” means to you. In addition to leaving a sum of cash to your children, keep in mind other assets and possibilities. For instance, if you have a vacation home, you might decide to leave it to relatives. This way, they will have a place where they can get together regularly. Or you may opt to set up a 529 plan to help pay for a grandchild’s education.
There may be other creative ways to spend money set aside for inheritance. “A legacy can be time spent with family members,” Gorman says. “Consider using vacations as a way to share your legacy versus trying to save money to pass on at your death.”
Know your circumstances. If you’re concerned family members won’t use the funds you leave them wisely, it may be best to set up specific guidelines. “Establish a trust that dictates how your assets are to be distributed after your passing,” Harvey says.
If you have a relative with a health condition, it may be necessary to make sure funds are available to provide support in the future. “There is only one circumstance that I recommend planning specifically for leaving a legacy, and that’s if you have a special needs child that is incapable of providing for themselves, especially if they have significant medical or day-to-day needs,” says Victor Medina, founder of Medina Law Group and president of Private Client Capital Group in Pennington, New Jersey. A life insurance policy or trust can allocate funds to the child to cover medical costs and care in the future.
Consider doing both. You may feel a strong urge to help your children and grandchildren during the next decades but still want to pursue new hobbies in retirement. “It is possible to live a lifestyle you want in retirement while also leaving a legacy to family and friends,” says James Enriquez, an Ameriprise financial advisor with Strategic Insights Financial Planning Group in McAllen, Texas. The key is to assess your priorities.
Sit down with your spouse and talk about the activities that provide the most fulfillment in your lives. “For some, starting a college fund for their grandkids or providing a mortgage down payment for their children gives them more joy than purchasing a second home they are going to visit a few times a year,” Enriquez says. “The opposite can also be true, and that’s OK.”