Preparing For The Worst

Do you have a plan in place?

Luke Perry’s sudden death from a stroke at just 52 should make us all realize that the death of a spouse can happen out of the blue. Are you prepared? Have you had those serious conversations with your significant other just in case the worst happens?

Failing to tackle these important topics can have serious ramifications. If your spouse doesn’t have the right information, it can lead to unnecessary surprises and make life complicated at an already challenging time.

Here are some items you should consider discus and sort out now, to ensure no problems arise later:

• Life Insurance. Do you have term life insurance on each other? The younger you are, the cheaper and easier it is to get low-cost term life insurance. There is no better investment you can make. I have had a few clients who suddenly found themselves without a spouse at a very young age, whose lives would have been far more difficult financially had their spouse not had some term life insurance. To figure out how much insurance is sufficient, calculate the amount of coverage needed to replace the annual income of your spouse for at least 20 years, which is usually the length of the insurance policy. For example, if your spouse makes $80,000 a year in after-tax income, you should buy $2 million in term life insurance. If you can get 30-year term life insurance, that is even better.  Obviously, the more insurance you can afford, the better lifestyle your spouse will have in the event of your death. Consider investing the insurance policy in dividend-paying stocks and U.S. Treasury bonds, which should generate enough in distributions to cover the majority of lost income on an annual basis. Buy term insurance, not whole life or universal life, as it is a lot simpler and cheaper.
   
• Debt. How much debt do you and your spouse have together? While mortgage debt is quite common for those who aren’t yet retired, you might have other types of debt that you need to discuss. Do you still have high interest rate student loan debt? Do you have a lot of credit card debt individually? Do you pay this debt off every month on time? Do you have a lot of auto loan debt? If so, it may make sense to consolidate all your debt under your mortgage loan to get the lowest rate that is fully deductible. One option is to call your bank/mortgage broker and refinance your current mortgage to include paying off any non-deductible debt. With interest rates declining recently, you may actually get a lower mortgage rate today.
   
• Retirement. Do you have adequate retirement accounts set up? Using the $80,000 a year in lost income in my previous example, you will also want to have saved $2,000,000 in retirement assets to cover living expenses in retirement.  You also want to be free of mortgage debt as well. Is your retirement housed in one account or spread out in different places? Do you have any old retirement 401K plans at previous employers that you can roll over into an IRA to consolidate things? Do you have a Roth IRA or a 401K Plan at work? Is your spouse listed as the beneficiary on those accounts? Make sure your spouse knows how many retirement accounts you have and how to access those accounts.

• College Expenses. How are you saving for college? Do you have 529 Plans for the kids? These savings plans are a great way to sock away money for college. If you live in a state offering the 529 plan you’re enrolled in, odds are you will also qualify for a state tax deduction, which is a nice incentive to open an account. CollegeInvest is Colorado’s 529 Plan, but you need to be a resident in order to get the state tax deduction. Remember that 18 years from now tuition at a very competitive liberal arts college will most likely cost $100,000 a year and a state university half that.                                                           

• Documents. Where are your important documents such as wills located? Is there a safety deposit box at a bank? Do you a key? Do you know each other’s passwords to access banking information online? Do you each have power of attorney for each other? Have you identified guardians for your children in case you both die in a car accident? Again, the more you figure out in advance, the better prepared you’ll be for the future.

None of these subjects are fun to talk about, but neither is trying to figure what to do after someone you love is gone without any warning. Using this check list should make it easier to start these important conversations and will provide you with peace of mind.