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When Should I Update My Estate Plan?

There are many different documents that can make up an estate plan. Some of these documents include last wills and testaments, a living will, a revocable living trust, power of attorney, and even a digital estate plan.

Having an estate plan can give you peace of mind that you’ve taken the necessary steps to protect your loved ones in the event that you pass away, or enable them if you aren’t able to take make decisions on your own anymore.

But the estate planning process isn’t a one-time thing. Life brings changes and your estate planning documents will need to change with it. If your plan isn’t revisited and revised, then it may not accomplish the goals that you want it to.

So when is it appropriate to update your estate plan?

When You Should Update Your Estate Plan

It may seem pretty obvious, but the best time to update your estate plan is when you have any major changes in your life.

Some common life events that can spur revisiting the documents include:

Marriage And Divorce

Whether you’ve just tied the knot or parted ways with your spouse, you should review your estate plan.

Make sure your new spouse is included in your estate plan or your ex-spouse is removed from it. Do this as soon as possible to ensure your finances are in line with your wishes.

If you pass away before your estate plan documents are updated, you risk your assets being distributed in a way that you wouldn’t want. For example, if you get a divorce and pass away before your will is updated, your ex-spouse may be entitled to some of your assets.

Children

One of the most common reasons for updating an estate plan is changes that occur within a family such as having a new baby, adding stepchildren, or your children simply getting older.

If you’ve remarried and had children from your first and second marriage, you will want to address this in your estate plan. This also goes for any stepchildren that you would like to include in the distribution of your estate since they’re usually not included by default.

If your children have reached the age of 18 or the age of majority in your state, they no longer need to have a guardian and this language can be removed from the documents. You may also wish to add your adult children as your personal representative or durable/health care power of attorney at that time.

Named Individual (Fiduciary) Changes

When you review your estate plan, you should check the people you’ve listed that are going to be responsible for making decisions on your behalf. These include:

The individual(s) named above as your Personal Representative (and successors) will handle the settlement of your estate after you pass away. The term “executor” is an older word for the same role.

The individual(s) named above as your Trustee (and successors) will handle your trust assets while you are disabled and after you pass away. Assets that are not inside your trust will be handled by your Power of Attorney (next section) while you are still living.

The individual(s) named above as your Attorney-In-Fact and Health Care Representative (and successors) will make financial and health care decisions for you while you are still alive but unable to make such decisions on your own.

Federal, State, and Tax Law Changes

The tax law is constantly changing so this is something you will need to take into account with estate planning. Take for example the SECURE Act, which went into effect on January 1, 2020. Many individuals who own IRAs and 401(k)s will need to make changes in their estate plans to address the impact of that legislation on inherited accounts.

Also, if you move from one state to another make sure your documents follow all local and state laws. You should review your plan documents with an estate planning attorney in your new state to ensure compliance with all the laws of that state.

review Your Estate Plan often

Understandably, trying to remember to review your estate plan when things change isn’t always easy. The truth is, most people don’t keep their estate plan up-to-date all the time.

For this reason, it is good practice to review your estate plan every 3 to 5 years or set aside a specific time each year to do a quick check-in, such as the new year or during tax time.

How Should I Invest My 401(k)?

A byproduct of being a financial advisor is the random financial advice texts from friends and family. One of the most common by far is, “What should I pick in my 401k?”.

While I try to be as helpful as possible, I can usually only answer with, “It depends…”.

Without knowing the fund offerings of the 401k plan, your investments outside of the 401k, your goals, and your risk tolerance, there is practically no way to say which investment options to choose.

Having said that, there are general tips that anyone can apply when making decisions related to a 401k.

Before we get to that though, I think it’s important to understand the basics of investing.

Back to the Basics

There are three basic choices when it comes to investing:

Cash or investments that can be turned into cash quickly. Sometimes also called capital preservation.

Bonds, which is essentially you loaning money to a government or corporation in return for a fixed payment back.

Stocks, which is a share of ownership in a corporation.

Historically, capital preservation and bonds are less risky than stocks but have a lower potential for return.

You’ll probably notice there aren’t any individual bonds or stocks listed as investment options in your fund line up. That’s because it’s hard for the average investor to purchase enough individual stocks and bonds to create a portfolio that is varied enough. So instead, you have a variety of mutual funds or exchange-traded funds (ETFs) to choose from.

Mutual Funds and ETFs. What are those?

Both mutual funds and ETFs are pools of money that are managed by a professional money manager and have a stated objective, such as investing in only Large U.S. tech companies or tracking an index.

The biggest advantage of mutual funds and ETFs is the instant diversification it can give you. That’s because the money manager is able to pool your money with thousands of other investors and purchase a mix of individual stocks and bonds that you wouldn’t have been able to otherwise.

Diversifying helps reduce your overall risk. Think about what your parents used to tell you, “don’t put all of your eggs in one basket!”. With mutual funds and ETFs, you are spreading your money across enough investments to reduce the risk of being wiped out by a single bad bet.

Just because you diversify doesn’t mean you don’t run the risk of losing money. The markets fluctuate up and down, and sometimes, they come down a lot. But that’s okay because contributions will be going into the account on a regular basis.

Having money going into your account every month enables you to build significant wealth. That’s because if the price of the investment drops, you are buying it at a discount. We all like buying things at discounts!

so… What Should I Choose?

Luckily, a majority of the hard work has already been done for you. Through a rigorous screening process, an investment fiduciary has pre-selected which mutual funds and ETFs are available to choose from. This is commonly known as the fund lineup.

TIP 1: Everyone is different when it comes to how they want to invest their retirement plan account, and before you make any decisions, I recommend filling out a risk profile questionnaire. This will give you an idea of what type of asset allocation fits your proximity to retirement and your willingness/ability to take risks.

Asset Allocation Matters

Asset allocation simply explains the mix of stocks, bonds, and cash in which you decide to invest. Broadly speaking, the younger you are the larger the share of stocks you should have in your 401k. As you approach retirement there should be a more balanced mix between stocks and bonds as you switch from solely focusing on growing your money to also caring about preserving it.

It’s common to see funds within your 401k plan that basically use autopilot to shift your asset allocation from stocks to bonds as you get older. These are known as Target Date Funds (lifecycle, target retirement) and you’ll usually see a naming convention like Target Date 2045. The year being your goal retirement date.

TIP 2: A mistake I often see is someone choosing a target-date fund but then also having other mutual funds selected that are being invested in the same manner. This means they are doubling their exposure to that asset class and paying twice the fees for no benefit at all! Stick with either a mix of stock and bond mutual funds that meet your asset allocation goals or go with a corresponding target-date fund, but not both.

keep fees in mind

TIP 3: No matter what investment options you go with, always keep fees in mind. They are usually referred to as the “expense ratio”.

The fees on the various funds can vary significantly too. According to the Investment Company Institute, in 2019, the average expense ratio of actively managed equity mutual funds was 0.74% compared to passive stock mutual fund expense ratios of 0.07%. This means that the bill on the $100,000 invested in your 401k could be $740 or $7 a year. Assuming 5% growth per year on that $100,000 for the next 20 years – the 0.74% fund would have a cost of $33,500.

There are very few factors under your control when it comes to future investment results, but one that you do control are the fees you pay.

Why Your Employer 401(k) Match Matters

Using an employer-sponsored defined contribution plan — 401(k)s, 403(b)s, etc. — is one of the most effective ways to save for retirement. That’s because most employed Americans have access to one and a majority of plans offer a matching contribution in some form.

Yet many 401(k) participants could be losing out on hundreds of dollars, if not thousands, each year by not taking advantage of the matching contributions that their employer provides.

How Does 401(k) Match Work?

There are a few ways your employer could contribute to your 401(k) plan through an employer match.

Dollar-for-dollar match: Your employer will match your contributions dollar-for-dollar up to a certain percentage of your total compensation.

Stretch match: In a “stretch” contribution set up, your employer matches a percentage of your contributions up to a certain percentage of your total compensation. For example, an employer might do a 100% match up on the first 3% of your contribution and then 50% on the next 2%, for a total contribution of 4% of your salary.

Non-elective match: In this arrangement, your employer will determine a set dollar amount to contribute to each employee, regardless of whether you are contributing to the plan or not.

Check out the table below to see how an employer’s matching contributions could look based on an individual with a $100,000 salary.

These are just some common examples. There are multiple variations of how an employer can elect to match employee contributions.

Determining the way your employer is contributing on your behalf will inform how much you need to contribute in order to receive the full amount.

Under the dollar-for-dollar example, if you contribute 5% of your salary to your 401(k), your employer will contribute the same amount as you. In this instance, you might want to contribute at least 6% to take full advantage of your employer’s match program and get the extra $1,000.

Think about it this way, if you aren’t contributing enough to unlock all of your employer’s match, you are essentially throwing away free money.

Here is a handy online calculator that can help you determine the optimal amount you need to contribute in order to maximize your employer’s match.

reaching the max

Typically, you’ll want to save between 10% and 20% of your gross salary toward retirement.

The maximum that you can defer into your 401(k) personally in 2020 is $19,500 with employer matches going above and beyond that. There is also a $6,500 catch-up contribution if you are over the age of 50.

While reaching the maximum contribution level may not be a realistic goal for the majority of people based on income levels alone, it is achievable for a lot of high-wage earners who are committed to saving for retirement.

If you are one of those savers who max out their 401(k)s, there are two issues that you need to be aware of:

If you hit the max early in the year, and
How your employer matches your contributions – on a plan year or pay period basis

You could be leaving money on the table, depending on how your company’s 401(k) plan is set up.

Per pay or plan year?

If your employer is simply putting in one lump-sum of matching contributions for you – typically at the beginning of the following year – then there’s nothing to worry about. You are getting the full match.

The issue arises when your employer is making the matching contributions on a per pay period basis and you are maxing out the contributions prior to the end of the year.

If you are no longer contributing to the plan because you’ve maxed it out for the year, then you are no longer making contributions per pay period, which means your employer won’t be making matching contributions!

The following illustration should help clarify the point:

Some assumptions:
Annual salary = $100,000 paid monthly
Salary deferral = 24% ($24,000 per year, which exceeds the $19,500 max)
Employer match = 100% up to 6% of salary ($6,000 per year)

In the above example, you would reach the $19,500 max contribution in October. That leaves two months where you’d not be getting an employer match. That’s $1,000 you’re missing out on! In order to fix this, you would need to reduce your contribution rate to 19.5%.

Something to keep in mind is that even if your employer uses a per pay match, the plan may have a “True-Up” feature, and, at the end of the year, you will receive a full match from any missed matches during the year.

You can reach out to your HR representative or review your plan’s Adoption Agreement to find out what type of match your 401(k) plan offers and if there is a True-Up feature included.

PRO TIP: If you are already maxing out your 401(k) plan contributions, you could save even more by opening a health savings account. These accounts are about more than paying healthcare expenses, and when properly utilized, they can supplement your retirement savings now and reduce your expenses in the future.

The goal of contributing to your 401(k) is to achieve financial independence, but you want to make sure you are doing it in the best way possible.

Be aware of how your plan operates so that you can ensure you’re taking full advantage of your employer’s match.

Should I Lend Money to Friends or Family?

Hard financial times can hit anyone and, with 58% of Americans having less than $1,000 in their emergency reserve, a person may find themselves struggling to pay their bills when such an event occurs.

Do they max out their credit cards? Beg the utility companies to pay late? Borrow money from a friend or family member?

If someone you care about comes to you for financial assistance when they’ve hit hard times, of course, you want to do everything you can to help them.

But before you start writing checks, ask yourself a few questions to help determine if its the right fit for you and your loved one.

Do you have money to lend?

When it comes to your financial ability to make the loan, ask yourself:

Do I have enough money set aside for emergencies after making the loan?
Am I on track with my other financial goals?
Do I have my own debts to worry about?
Would I still be in a healthy financial position if I never get repaid?

If you’re not able to lend the money, you can show the friend or family member that you empathize with their situation and perhaps suggest alternatives that may work instead.

Will THis Negatively impact your relationship?

Your relationship with this person is probably important to you and you’ll need to carefully consider how lending them money will affect that.

How would you deal with them spending money on other stuff — like a vacation — before paying you back in full? What if they miss payments or never pay you back? Would you be able to retain the relationship?

If lending money is going to impact the relationship negatively, then you may want to consider helping them in other ways.

Why do they need the money?

Perhaps this person is truly in a unique situation and a small loan is just what they need to get back on their feet.

On the other hand, if this person needs help on a regular basis, a cash infusion addresses the symptom rather than the underlying issue. It could be careless spending or another issue that needs to be fixed, not enabled.

Instead of offering money, offer to help them fix the problem. For example, you could help them set up a budget or offer to pay for a class like Dave Ramsey’s Financial Peace University.

lending smart

If you decide you are comfortable loaning your friend or family member money, make sure you have a conversation up front about the terms of the loan. Talk with them about how the repayment will work and make sure it works for both parties.

Once the details have been discussed, create a written loan agreement to detail the amount of the loan and how much interest will be charged and paid (annually, quarterly, monthly). Include how and when the loan will be repaid. Set expectations and steps for how late payments are handled, and any fees for late-payments and how those fees will be calculated and charged. Also, state what happens if the loan is not repaid.

Creating a collaborative agreement and setting clear expectations together will help foster a pleasant lending experience for both parties.

Do I Own Too Much Company Stock?

If you work for a large corporation, chances are they offer some way to obtain company stock. A lot of companies use stock (ownership in the company) as a compensation incentive and as a retention tool for key employees.

various Ways to obtain employer stock

There are numerous ways that your employer can make their stock accessible to you. Here are the most common ways that I see:

Stock Options (ISOs and NSOs)
Restricted Stock
Restricted Stock Units (RSUs)
Stock Appreciation Rights (SARs)
Phantom Stock
Employee Stock Purchase Plans
Employee Stock Ownership Plans
As one of the investment option of your defined contribution plan

Talk about complex!

No matter which way they present it though, the end result is usually the same. You take them up on their offer and you accumulate more and more company stock as time goes on.

And, why not? You’ve been there for years, you love what you do, and you can’t imagine the company ever going out of business.

the Rewards

Do you want to know a potential way of getting rich? Putting a sizable percentage of your portfolio in one asset that appreciates in value.

Imagine working for Google or Facebook over the past several years and acquiring company stock along the way. You could have accumulated quite a bit of money by taking part in one of their employee stock purchase plans.

It’s rare circumstances like these that having the majority of your portfolio consist of your employer’s stock can pay off.

The risks

Do you want to know a potential way to lose all your money? Putting a sizable percentage of your portfolio in one asset that depreciates in value.

Take General Electric (GE) for example. GE is one of the most recognizable companies in the world. I bet the employees of General Electric never thought twice about owning its stock.

But it’s share price has fallen nearly 80% since March of 2016. This kind of price decline would be absolutely devastating to an employee with a majority of their retirement savings in the company stock.

double the risk, double the pain

No matter what your view on the financial stability of your employer is, the simple fact is that employer stock is one of the riskiest investments you can own.

By simply by working for your employer, you already have a large portion of your personal financial success tied to your employer’s success.

Your job provides you income, which enables you to save for the future in the first place. Your financial wellbeing is already dependent on your employer, adding company stock into the mix only doubles your risk. If your employer goes out of business, you lose your job and your retirement security.

How Much is too much?

Okay. You’re probably at the point where you want to sell all of your company stock. But that’s not the message I want to convey.

It’s true that I think the risk of having too much employer stock in your portfolio outweighs the potential rewards but a small portion can be part of a generally diversified portfolio.

A general rule of thumb to follow is to have no more than 5% of your investment portfolio in any single stock (not just your employer’s).

Of course, the thing about rules of thumb is that not everyone’s thumb is the same.

In order to determine if you have too much company stock in your portfolio, consider these four things:

What is your appetite for risk? If you are the gambling type and can stomach the thought of your investment losing value if it means hitting the big one, then a higher allocation to a single stock might make sense for you.
Do you have the ability to take the risk? If the stock drops in value by even 40%, will it totally disrupt your ability to retire? If you have sizable, diversified, retirement savings outside of your employer stock you can probably take on more risk than if you didn’t.
How many years until you retire? If you are 20 to 30 years away from retirement, you have the time to make up for loses and can be a little more concentrated. If you are within 20 years of retirement, you’ll probably want to scale back.
Does the stock fit into your overall financial plan? Will the stock help you achieve the rate of return you need to reach your retirement goal? There might be a specific purpose for the employer stock and it’s okay to be a little more concentrated.

At the end of the day, it takes having a well thought out financial plan to determine how you handle your concentrated stock positions, so make sure you have one!