It’s Father’s Day, which is a special day to celebrate the special men in your life. Whether you are a father, have a father, or may be a father, it’s a good time to ask some questions that will greatly impact your financial future. Some of these conversations may be difficult to have – and they may require involving people other than just your father – but lacking knowledge and not having a plan in place will ultimately make things even more difficult down the road.
Since we are celebrating just how important our father is, it is important to make sure certain things have been planned for. So feel free to honor dear ol’ dad the way he deserves, but keep in mind some good financial questions you should consider asking now and throughout the year. Take some time to talk to your father about the family plan.
1. Will we be ok if something happens to you?
What type of insurance does your father have, and what does it cover? A lot of people get coverage when the need first arises and they don’t update their insurance plan as the need grows.
Most people have either employer-provided coverage, or life insurance they purchase when they first get married or have their first child. This can become an issue if they don’t increase their coverage when their second or third child is born.
It’s natural – most of us don’t want to think about dying, after all. But this needs to be addressed because you won’t have a second chance if your dad unexpectedly passes away or is incapacitated.
If your dad has life insurance, he should ensure it helps cover cash flow needs, debts, and other goals he has for his family members in the event of a death. Without income, families may not be able to afford ongoing expenses, fund retirement or meet other long-term goals, like paying for their kids’ college educations. While not everyone needs life insurance, this father’s day is a good time to ask your father (or yourself) whether your family will be fully taken care of.
Besides life insurance, there is also disability insurance, which is insurance that covers your earned income in the event of a disability that prevents you from doing your job. This is insurance that all employed people should consider – if they are no longer able to earn an income but still have spending needs, they could end up being a burden on their loved ones.
Disability insurance is typically structured to replace 60%-70% of monthly income, and individual policies are a tax-free benefit if paid for by the insured. If it’s a company-paid plan, then it will be taxable, and premiums are usually based on age, job title, health, elimination period desired, monthly benefit desired, and length of coverage.
While short-term disability is often an employee benefit, long-term disability insurance is typically purchased privately. Talk to your financial advisor to make sure you have the right type and the right amount of disability insurance.
Long-term care insurance
It is unlikely that your father needs long-term care insurance; however it is important to make sure he doesn’t. The cost of long-term care insurance has increased dramatically over the years, but if you have a family history of health problems, then long-term care insurance may be advisable, as these illnesses can eat up an estate pretty quickly in his later years. Long-term care insurance can help offset the costs of caring for a family member suffering from illnesses that require costly medical care.
This is by no means a comprehensive list of insurance policies that are available. We recommend, in addition to an insurance agent who may provide insurance coverage options, that your father speak to a financial advisor who is held to a fiduciary standard and will provide recommendations that are in his best interest.
2. Do you have enough insurance?
If your dad has insurance, is it enough? Often arbitrary numbers are chosen because they sound like they will be enough, but in many cases they aren’t. $500,000, $1,000,000 – $5,000,000 – that might sound like enough, but has your father actually thought through all the things that need to be taken care of if he is no longer around? Ask your father about how he arrived at the amount of coverage he has and the calculations he did to ensure this will be enough in case the worst-case scenario does happen. If your dad doesn’t have enough coverage, then not only is your family without one of the most important people in their lives, but they also will likely be unable to live the life they have grown accustomed to. No one wants to lose their dad, and their house, and their ability to go to their dream school.
When it comes to having enough insurance, your dad should think about all the financial items that are needed to fill the gap of what one person does, if he or she were to pass. How do you know if enough is enough? Your father should speak to a fiduciary, in addition to an insurance broker, so he isn’t sold insurance products he doesn’t need.
3.Are you on track for retirement?
Whether your dad is preparing for retirement or is already in it, he should know where he stands and what he needs to do. Personal finance software like our free tools can help him check on his investments, and see whether he’s on track financially.
There are many factors that can impact the shape of your dad’s retirement. For instance, what if Social Security is diminished at some point? While it’s likely his Social Security will last, there is a certain level of unpredictability with it. And while the market probably won’t drop 50% and take decades to recover, this is something your father may want to consider to ensure retirement readiness. Planning for the unknowns will give you a lot of peace of mind.
In the event that your dad has more work to do when it comes to preparing for his retirement, there are actions he can still take to get on track and prepare for a solid retirement. Talking to a financial advisor can help in the retirement planning process. But remember, the longer he waits, the fewer options he may have.
4.Do you know how you’ll transition to retirement?
Being on track for retirement is one thing. Actually knowing how to allocate you’re savings in retirement is another. It’s not just about how your time is spent in retirement. How will you switch from accumulating/saving for retirement to living on your savings in retirement? Unfortunately, this question often is asked when it’s too late to afford any mistakes.
Many people who are getting closer to retirement age have been working and building their retirement funds for 30-plus years. While they know how to build that nest egg, many don’t know how to actually retire on it.
Many people who are getting closer to retirement age have been working and building their retirement funds for 30-plus years. While they know how to build that nest egg, many don’t know how to actually retire on it – how do you turn a portfolio of investments into an income stream? If you need a monthly set income, how do you determine that amount, and how do you create a realistic income stream from your nest egg? What if the market goes down? And don’t forget about the seemingly unending complexities of related taxes.
While it’s imperative to have a saving-for-retirement plan, it’s just as important to have a withdrawal strategy. A financial advisor can be very helpful in creating a well ironed-out plan. For example, at Personal Capital one of the most common things we help our clients with is their required minimum distributions (RMDs) and taxes surrounding retirement income. The benefit of having a withdrawal plan in place is that it often usurps the need for long-term care; if you have a good strategy to work toward, you are less likely to drain the principle of your retirement savings. Preserving principal of your dad’s retirement nest egg means he will have the capital in case of emergencies or large one-time expenses occur in retirement.
5. Is your will up to date?
Most people draft their will around a major life event like getting married or having a child – but then they don’t update it as their life progresses. Before they know it, time has passed and situations have changed. More children, grandchildren, deaths or divorce are just some of the life events that can change the will’s original intent.
Has your father updated his will lately? And if he has, is it done in a way that may cause conflict for the rest of the family? For example, if one person in the family has five children and one has none, is there a plan to distribute assets in a way that won’t cause more grief after he passes? Should the grandchildren be written into the will? And what happens if both parents pass at the same time? An estate planning attorney and a financial advisor – even if there isn’t a trust involved – can be great resources.
Not having a will can cause strife within an already grieving family. You should check with your dad to make sure that his will is clearly spelled out to avoid this as much as possible.
6. Whom should we call when you are incapacitated or pass away?
Does your dad have a list of trusted advisors who help him manage your family’s estate and financial well-being? These are often the most important people to talk to in case he becomes incapacitated or passes away. Again, this is a tough conversation to have, but it’s important to have this information on hand to help your family navigate important financial initiatives should they need to do so. This is something that could easily be written into a will, which is why it is even more important that your father update his will every few years. Some people who should be on the list include:
- Estate planning attorney
- Your family’s accountant
- Your family’s financial advisor
- Power of attorneys
It’s Father’s Day, and of course we want to celebrate our father. No one wants to think about what these types of questions represent. But it’s important to ask these questions while you can, so he – and you – can have peace of mind for your family.