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Somewhere around the day we decide to retire, we may think that we have a lot of money – a lifetime of earnings, a gold-plated nest egg. The light refracting from that shiny nest egg can blind us. Be cautious with your spending in retirement.

Don’t Give It Away.

Some of us would like to give part to the children. A child may need money to buy a home (take a promissory note and record a mortgage), get through a rough patch during divorce (ditto) or be disabled (fund a special needs trust – preferably when both of you are gone). Most of the time most of the children are able to pay their own way. They will be able to work for decades to build up their own nest egg without depleting theirs.

Gifting them through inheritance is better for tax reasons as well. Anyone can give anyone else up to $15,000/year with neither party paying gift tax. Anyone can pay anyone else’s medical or educational expenses. But if someone later sells property which they received as a gift, they must pay capital gains tax on the difference between the net sales proceeds and the price at which the property was last purchased. This is particularly a problem for land which has passed through the generations by deed of gift.

Don’t Spend It All.

We’ve all see those bumper stickers, “I’m spending my children’s inheritance.” Laudable and laughable though this is, we can forget how much we will need for the many years of chronic illness, limiting conditions and disability which accompany our increased life expectancies.

Think Carefully About Investing – And Think Again.

There is a lot of half-baked investment advice and advice which only looks like it fits your situation or no longer fits it today. Before applying the 4% rule or the 2% rule or opting for income or moving from 60/40 to 40/60 or anything else, set aside funds for what you will need – even if you think that you will not.

Simply put…

There is a 100% chance that you will need a prepaid funeral plan or some money in a pay on death account to pay for your last expenses. A small life insurance policy is fine – if it will pay the person who is making the arrangements and that person can wait a week or two to get the money.

There is a 75% chance that you will need personal and medical assistance over the long term, for years and for many years. However well intentioned, your family will be able to provide very little of this and then not for very long. Medicare, for which you likely have a co-pay, will pay for a limited number of hours of home health care on a doctor’s orders only if you need care from an R.N., L.V.N., physical therapist or speech and language therapist. What if you simply can’t lift heavy wet sheets out of the washer or mow the lawn anymore? What if going to the grocery and cooking, doing the housework or remembering which of that increasing number of pills to take when begins to elude you? What if you forget which bill you have paid or if you really wanted to give a donation to that charity or have already?

Set aside money to pay someone to help with the laundry, the cooking, the housekeeping and yardwork. Set aside money to pay for Eyes On or a similar medication reminder system which will remind you and, if you miss a dose, remind someone else. Set aside money for a bill paying service. Freeze your credit. Get on do-not-call lists. Remember: you gave at the office.

There is a 50% chance that you will find yourself in a nursing home – and likely not just for short-term rehab. Medicaid doesn’t pay for everything. Nursing homes, which have their own bills to pay, have only so many “Medicaid pending” beds. Even if you cannot pay out of pocket in a private pay only nursing home (your best option for at least slightly better care), set aside some money to pay for the first few months so that you can get a bed. If there are no beds available, you may find yourself in an unregulated or lightly regulated board-and-care home with no nursing staff at all.

Once you have these pots of money set aside, you can apply whatever spending rule you want to the rest – knowing that there is a 100% chance that you will not be able to live on inflation-ridden Social Security (or any other annuity) in 10 years and, for 50% of us, a 100% chance that we will have to. If you are in the lucky “other half,” do invest to keep ahead of inflation and of rising medical costs.

Plan Simply and With Options.

Give yourself a “KISS” when it comes to planning. (Yes, you know what that stands for). Beware overly complex investment and legal planning. Peter Lynch, former chief investment officer for the Magellan fund, had a rule: if you don’t understand it, don’t invest in it. That applies equally to your estate plan. It should be user-friendly, flexible enough to change with your changing circumstances and changes in law, and with only the bells and whistles you need.

Additional resources:

For ways to stay independent longer, read Retirement Savings: Don’t Tap Them Too Early
Learn ways to protect your retirement account: Your Retirement Account and Your Heirs

Elder law attorney, Terry Garrett, is a member of the National Academy of Elder Law Attorneys and is active in the Texas and Austin Bar Associations. She graduated with honors from Cornell University. She was on the Dean’s List at Wharton Business School. She earned her J.D. at Columbia Law School, receiving the Parker Award and a Mellon Fellowship.

She assists families of people with special needs, people planning for the retirement years and people administering estates.


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