As blended families increasingly become the norm, retirement planning has taken on an added level of complexity. With smart and strategic planning, you can prepare for retirement and your family’s future.
Retirement hasn’t slowed Richard Hayman down much. He thought he would retire several years ago selling the family business to a public company. But at 65, he works part-time as a coordinator for residential communities. “My concept of retirement is one where I can control my time,” he says. “It continues to be filled with work, play and travel – not necessarily in that order.”
Hayman is facing the next stage of his life with optimism, thanks in large part to planning that took into account the blended nature of his family. “Nobody wants to outlive their money and become a burden to their children,” Hayman says. Both he and his spouse are on their
second marriage, and they share five children from their previous marriages – a situation that oftentimes complicates or stalls retirement planning.
“Divorce can take a pretty big chunk out of your retirement savings,” says Ann McKeever, a Financial Consultant for First Midwest Financial Network. “You may have to transfer 50% or a portion of your 401(k) to an ex-spouse, or take a loan on a 401(k) to start your new household.” Whether you support an ex-spouse, deal with multiple pensions or had children later in life, adjusting your financial plans accordingly will help keep both your assets and your dreams intact.
A Plan of Action
“Married or not, blended family or not, having the discipline to set money aside for your retirement is tough,” Hayman says. By maximizing his 401(k), keeping his spending in check and establishing beneficiaries early on, he avoided the financial pitfalls that often befall other families in similar situations.
These days, blended families – those with two parents and at least one child from a previous relationship – are as all-American as the fictional Cleavers of the 1950s. Yet they’re also much less likely to plan for their retirement than their traditional counterparts. In fact, according to the 2008 MetLife Mature Market Institute’s Family Matters study, few respondents feel that they have a good retirement plan in place – only 15% of single women, 22% of blended familes, and 30% of traditional families. In general, people underestimate the amount they need to save for retirement, and this tendency can become amplified in non-traditional families. Because blended families face more financial challenges, they have even more reason to dip into retirement savings, whether it’s in the form of investments, home equity or other loans.
For one thing, blended families tend to have more children and grandchildren, which can make saving and paying for college seem especially daunting. “With all parents, planning for the college expenses is becoming more and more crucial,” McKeever says. She points those families toward such vehicles as a 529 Plan, which helps them get a state income tax deduction and provides tax-free growth for money set aside for college.
With so many uncertainties in Social Security, Medicare and health care, Hayman advises starting your retirement planning as early as possible. “Even if you invest $5,000 when you’re in your 20s and let it grow, that’s better than doing nothing,” he says.
Facing the Unknown
If you support a non-traditional family and want to maintain your current lifestyle, you may have to approach your retirement plan with extra caution. “Make sure you’re not taking on a lot of risk with your plan,” McKeever says. The general rule of thumb is that people need 60% to 70% of their income at the time of retirement for general living expenses, but it’s also important to budget for additional costs, such as rising inflation or real estate taxes.
If you’re worried you’re not setting aside enough, certain tactics such as systematic investment plans can help start the savings process. Also taking advantage of tax savings offered by Traditional or Roth IRAs or using annuity products, which don’t have contribution limits like IRAs do, could help cover future costs.
Planning for the unexpected also becomes more significant if you have an ex-spouse. “In blended families, there’s more potential for disagreement because there are more people involved,” McKeever says. Former spouses don’t always see eye to eye on how funds should be used or who should maintain control over assets for minor children. If you enter a nursing home, for example, how does that affect power of attorney over your assets? If your property and assets are in joint rights of survivorship, then what happens when you pass away? Who will inherit: Your current spouse, your children from your previous marriage or your children from your current marriage?
To mitigate risk in these situations, don’t put off updating your will and insurance policies, McKeever advises. For one thing, insurance is a means of providing a tax-free death benefit to beneficiaries. This could allow a surviving spouse to pay down debt, put away money for college expenses or put aside money for retirement.
Different policies can serve your family in different ways. For instance, if you overfund your universal life insurance policy, that can function as a supplemental retirement fund in the future. McKeever explains, “The extra premium builds up the cash value, which can be withdrawn later tax-free and used for retirement, or possibly for college costs for kids.” Keep in mind, however, that such policies usually need to be funded for 10 to 15 years before you can tap into them, making them a better retirement strategy for someone under 50 than someone who’s already 65.
If insurance isn’t a good option for you, there are other vehicles for assigning assets to beneficiaries, from a POD (payable on death) bank account to a living trust. For many parents, the method is not as important as ensuring that their assets will be handled in the way they intend and that their children will be treated fairly.
Different Strokes for Different Folks
Of course, non-traditional families take on many forms, and blended families aren’t the only ones whose retirement plans warrant examination. In McKeever’s experience, single mothers and widows may experience a shortfall when their income drops from joint to single.
“Single mothers may earn less than men, may not have pensions, and may spend less time in the workforce because of staying home with children or leaving to care for sick or elderly parents,” she says. As such, they often feel they simply can’t afford to contribute to a 401(k) or 403(b). But that’s a problem, McKeever says, because these same women are less likely to have the pension plans and annuities blended families can fall back on.
If a 401(k) or 403(b) is an option, “they can’t afford not to contribute,” McKeever notes, “especially if their company offers a match. That is free money that they are leaving on the table if they don’t participate.” Even contributing 2% of each paycheck to a 401(k) will eventually add up.
Widows who collect Social Security benefits face another issue, because now they have to pay the bills on one monthly paycheck instead of two. Therefore, someone who has lost a spouse may benefit from an option that provides a steady stream of lifetime income. If you’re a widow and you want to control how your assets are distributed, McKeever points to restricted beneficiary elections – a payout typically added to annuities that controls how the beneficiary receives money – as a possible solution.
A distribution option gives the owner more choice over how the beneficiary or beneficiaries will be paid. You can take scheduled withdrawals based on life expectancy – whether for yourself or someone else – receive fixed payments for a specified period of time or do some combination of the two. “A surviving child normally takes a lump sum distribution but can defer payment for five years or take scheduled withdrawals,” McKeever adds.
No Time Like the Present
Naturally, your plan should reflect your current life situation. For a couple divorcing in their 30s, retirement is probably the farthest thing from their mind. But the stakes are higher the older you get, and a marriage ending when a couple is in their 50s or 60s can throw a serious wrench into the best-laid plans. Even if you remarry, some retirement assets and life insurance payouts could be distributed to your ex-spouse because a retirement plan is considered marital property.
It’s much more difficult to protect your nest egg, let alone replenish it, once you’re no longer working. Families that have seen their retirement funds shrink over time should seek the help of an advisor who can examine their individual situation for ways to get their retirement budget back on track.
Regardless of your family structure or the value of your assets, it’s important to have a plan in place and adjust your risk tolerance to be more conservative at least five years prior to retiring. “Before you retire, time is on your side,” McKeever says. “If you make mistakes or experience a market downturn, you still have time to recover.”
The changing nature of American families may alter the way we plan for retirement, but that doesn’t mean you have to be rich to retire well. With people living longer, healthier lives, retirement can be a wonderful time to pursue your passions and spend time with family. “The most successful savers are the ones who do it consistently,” McKeever says, “not the ones who make the most money.”
With a little foresight and discipline, people from non-traditional families can enter retirement knowing they and their loved ones will reap the fruits of their labor for years to come.
Retirement Planning Tips
Does your retirement plan reflect your family’s individual needs? Here are some retirement planning tips for non-traditional families:
Blended families (Those with two parents and at least one child from a previous relationship):
- Any time there is a life-changing event, such as divorce, marriage or the birth of a child, update your designated beneficiaries for all of your retirement plans/accounts and insurance policies.
- Consider establishing a living trust to protect assets that are designated for your children.
- When purchasing a home with your current spouse, consider who will be named on the deed. This will decide how funds are distributed when the property is sold.
- If you have children under age 18, be sure your will designates someone to care for them.
- Maintain communication with your ex – especially concerning how to cover the costs of college, weddings or health care for your children.
Single women and widows:
- Women tend to live longer than men, so consider products that
provide a steady stream of retirement income as opposed to one lump sum.
- Consider establishing a living trust to protect assets designated for your children.
- Document how you’d like your life insurance policies and retirement accounts to be distributed upon your death.
- If you decide to marry or remarry and you have children, consider a prenuptial agreement to ensure that your spouse is in agreement with any plans you already have to set aside assets for your children.