Retirement, Estate Planning and Debt in the New Year
For the New Year, there is an importance to retirement and estate planning and how debt can impact your ability to accomplish your goals. Suppose a family member loans you money to help you pay for day-to-day expenses or health care costs. With people living longer and the catastrophic cost of long-term care going up, it is entirely possible that you may have to borrow or seek financial help from your adult children, credit card companies or others. What effect would that have on your retirement and estate planning and is there anything you can do to avoid being put in this situation?
It has been said that proper retirement and estate planning is the key to having the resources to enjoy one’s golden years and leave a legacy to one’s heirs. However, two of the biggest obstacles to avoid on the way to these goals are procrastinating about saving for retirement and accumulating unmanageable debt. Let’s start with how to save enough for retirement.
It may be understandable that retirement is the last thing on young people’s minds, but it is also regrettable, because the earlier one begins to save for retirement, the easier it is to build a comfortable nest egg, which reduces the likelihood that you will have to rely on someone else or borrow money. For example, someone who saves $100 per month beginning at age 25 will have saved over $300,000 by age 67, assuming a rate of return on investment of 7 percent. Saving the same amount of money per month but not starting to save until age 40 would result in savings of less than $100,000. This phenomenon is due to the magic of compounding of interest. Your future investment earnings and gains are based not only on the amount of money you invest, but also, on the amount of earnings and gains you have over the years. The sooner you start to save; the better off financially you will be during retirement. You do not want to rely solely on Social Security retirement benefits. While these benefits may provide a safety net, they are not enough to retire in comfort.
Also, don’t count on a company pension as they are becoming less common these days. In fact, many companies have eliminated or significantly cut back such plans. Much of the responsibility of providing for one’s retirement is up to the individual. A 401(k) plan, especially with an employer contribution, can be a tremendous help, and can motivate even young workers to save.
Debt is the other major issue that can adversely impact retirement planning and estate planning. With too much debt, many older Americans find they cannot afford to retire or pay for their health care, much less leave a substantial estate to their heirs. To get control of debt, it is important to focus on paying down high-interest debt first, such as credit cards. With banks paying less than 1% interest on your savings accounts, it is poor financial planning to pay a credit card company 15 – 25% to carry a balance on that credit card.
Debt – even a healthy, manageable amount – can affect estate planning in less obvious ways as well. For instance, if you are planning to provide for some heirs through a trust and others through a will, you should be aware that debts are typically paid from your estate and should consider how that will affect your bequests. Perhaps the person who made the loan to you is willing to forgive the debt on your death. If not, how will the debt be satisfied? To avoid unnecessary confusion or litigation, it is important to address these issues prior to your death. Retirement, estate planning and debt need to be addressed together and not in a vacuum in order to ensure that your golden years are as “golden” as possible.
Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP and has been honored as one of the “Best Lawyers” in America for each of the last seven years. He is past President of the National Academy of Elder Law Attorneys (NAELA) and past President of the New York Chapter of NAELA. Mr. Krooks has also served as chair of the Elder Law Section of the New York State Bar Association. He has been selected as a “New York Super Lawyer” since 2006. Mr. Krooks may be reached at (914-684-2100) or by visiting the firm’s website at www.elderlawnewyork.com.