David Cox watched his father sacrifice and save for decades while working. Now, he has a specific idea of what he’d like his dad to do with the cash he’s accumulated.
“I’d like him to spend that money,” says Cox, vice president of sales for executive plan solutions firm benefitRFP Inc. And if that means he has no inheritance, that’s OK. “He didn’t work his whole career to fund my retirement,” Cox says.
Older Americans entering retirement may face conflicting emotions about how to manage their nest egg. While spending assets down to nothing seems popular with some retirees nowadays — partly due to the Bill Perkins book “Die with Zero” — leaving a legacy for heirs or a favorite organization is also appealing.
“It’s not a binary equation,” according to Teresa Greenip, a partner and senior wealth manager with Aspiriant Wealth Management.
With proper planning and professional guidance, retirees can determine whether to spend their nest egg down to the last dime, save it for future generations or opt for a combination of the two.
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You Earned It, You Spend It
For some people, retirement is the first real opportunity to delve deeply into personal interests such as travel and hobbies. Stepping out of the workforce means they’ll have time to pursue a retirement bucket list. But without a regular paycheck, they’ll need to dip into their nest egg for the necessary money.
“It’s important to enjoy your retirement,” says Cox, who believes retirees shouldn’t feel miserly about spending. “We only get one trip on this (planet).”
One glaring risk of spending with abandon is the possibility that a retirement savings account may run dry.
“The risk is always (that) you’re going to outlive your money,” says Kelsey M. Simasko, elder law attorney with Simasko Law in Mount Clemens, Michigan. “There’s always the possibility that the stock market tanks, you run out of money and you’re moving back in with your kids.”
This risk can be mitigated by having a written retirement plan with flexibility built in so it can be changed as needed.
“There has to be some recognition of the unforeseen,” Greenip says. “There are so many paths that life can take.”
If the market drops, that may mean you’ll have to adjust spending downward for some time. Or if health issues arise, money may need to be diverted to medical care.
However, long-term care isn’t necessarily something you should have to spend all your money on, according to Simasko. “There are programs out there to pay for that,” she says, and working with a wealth preservation planner is one way to prepare for this and other expenses.
[READ: How to Build a Balanced Retirement Portfolio]
Leave a Large Gift for Generational Wealth
Some older Americans are more interested in leaving a legacy than spending their cash. They may want to leave a large financial gift to a favorite charity or organization. Or they may want to leave their children or grandchildren a large inheritance to create generational wealth.
“We’re seeing a lot of people consider passing along those assets earlier in life,” Greenip says.
It can be rewarding for retirees to see their financial gifts put to use while still alive. However, there are disadvantages to transferring some assets prior to death. For instance, transferring real estate to a child or grandchild while you are still alive could result in significantly higher capital gains taxes than if the transfer occurred after death.
On the other hand, withdrawing money from traditional IRAs and gifting that cash or reinvesting it in a Roth IRA can save your heirs a significant amount of income tax in the future.
“The IRS taxing inherited IRAs is a huge thing to consider,” Simasko says.
Estate planning professionals can be invaluable for older Americans looking to leave a legacy. “You want to work with someone who does that type of work,” Cox says, noting that not all planners have expertise in this area.
Not only can they advise on how and when to distribute assets, but they can also set up your estate in such a way as to ensure that your gift will be used as intended. For instance, trusts can be created with guidelines so that your money is used for specific purposes or passed on to children once they reach a suitable age.
[Related:Should You Make a Free Will Online?]
Strike a Balance Between Spending and Saving
Of course, spending all your money and saving funds for a final gift are not mutually exclusive goals. But failing to plan could result in money being diverted for expenses that aren’t priorities.
“Sit down and write out (your) goals and values,” Greenip advises. Then, you’ll be able to more clearly see the best way to use your available resources. “The only way to really understand that is to put pen to paper.”
Work with a financial planner to determine what strategies make sense for your situation. For instance, some annuities can be used to provide a legacy gift to charitable organizations while providing you with income during retirement.
Those with more modest nest eggs may find they have fewer options. Paying for essentials such as housing, groceries and health care should always take precedence over other goals. As Greenip notes: “Being able to care for your own needs is a gift to your family.”
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Should You Spend Your Nest Egg or Leave a Legacy? originally appeared on usnews.com
