Planning

When considering whether to use professional guidance in designing and implementing your financial plan, one factor in the equation should be planning for the possibility of cognitive decline on the part of the person responsible for making financial decisions.

With retirement, it is important to consider how declining cognitive skills associated with aging will make it increasingly difficult to self-manage your investment and withdrawal decisions. For households where one person handles money matters, surviving household members will be especially vulnerable to mistakes when they outlive the family financial manager. Developing a strong relationship with a trusted financial planner can help with both of these matters.

In terms of cognitive decline, research1 using financial literacy tests over time to older populations has shown that financial literacy tends to decline by about 1% per year after age 60, but that financial confidence in one’s own abilities remains the same.

Other research2 has revealed reduced numeracy with age. It becomes harder to perform basic arithmetic calculations and understand the nature of risk, not to mention answering questions such as which number is smaller: 1/100 or 1/1000.

Declining abilities to do financial calculations and other types of cognitive impairment make it increasingly difficult to manage a complex investment and withdrawal strategy as you age.

It is important to plan ahead and make binding decisions before cognitive impairment sets in. Examples of these binding decisions include working with a trusted financial planning firm that can be on the lookout for cognitive impairment and help arrange for necessary additional help or using an income annuity (which has been called “dementia insurance”) to lock in an income stream and reduce the need for portfolio management skills.

Since confidence in your financial skills does not decline with age, plan for these possibilities ahead of time.

Can a financial advisor be cost effective? Ultimately, that depends on your answers to a series of important questions:

~ Do you have the time, energy, interest, knowledge, and desire to implement all of these decisions on your own? Do you enjoy financial planning?

~ Will you overcome the inertia of inaction to put together all the various parts needed to create and implement an effective and
coherent overall plan?

~ Will you continue to periodically update your plan?

~ Have you determined how to make sure your planning will be maintained properly if other family members need to take control of it?

~ Are you working with a comprehensive financial planner who does more than just manage investment portfolios and is capable of implementing good financial planning decisions?

If you have the time, energy, knowledge, emotional detachment, and desire to do your financial planning on your own, then you may make an excellent advisor. If your advisor is less than capable, then you might be better off saving yourself the fee or taking your business elsewhere. Otherwise, consider that both of these studies demonstrate how working with a financial advisor can lead to net positive outcomes and be cost effective, especially as you age. It doesn’t take much to improve your standard of living through better decision-making, even after accounting for any fee related to planning advice.

Concepts and excerpts from “Wade Pfau’s book “How Much Can I Spend in Retirement: A Guide to Investment-Based Retirement Income Strategies”

1 ”Old Age and the Decline in Financial Literacy” by Michael Finke, John Howe, and Sandra Huston, SSRN Working Paper, August 24, 2021.

2 “What is the Age of Reason?” by Sumit Agarwal, John C. Driscoll, Xavier Gabaix, and David Liabson, Center for Retirement Research at Boston College.

At some point after becoming independent, we all start to realize that life comes with a lot of paperwork. If we work, we file tax returns. If we save, we get bank statements. If we own anything of value, we get insurance policies. Once you begin to buy property or invest, the volume of paper may make you may start to wonder how there are any trees left at all.

Luckily, most of these forms, invoices, and pages of boilerplate can be tossed at some point – the trick is knowing when you can safely say goodbye.

Tax Documents

If you file tax returns, you will want to keep copies of your Federal and state returns for at least three years (although some states, like California, require more), as well as any supporting documentation that proves income, deductions, and credits.

If you think you forgot to report income, and it is more than 25% of your gross income, keep six years of returns.

If you claim a loss for worthless securities or bad debt deduction, keep seven years of returns.

If you made taxable gifts or received an inheritance, keep all forms along with supporting documentation in your permanent records.

Healthcare Documents

If you have a Health Savings Account keep all medical receipts from the date the account was opened (this allows tax-free withdrawals years later).

Did you write of medical expenses on your tax return? If so, keep records for as long as you keep the applicable tax return.

If you are on Medicare, keep your Summary notices for at least a year, or until your bill is paid in full.

If you think you may apply for Medicaid (perhaps due to long-term care expenses), keep all financial statements and records of transactions for the previous five years to support your application, as there is generally a five-year look-back provision.

Legal Documents

If you are a U.S. citizen, keep copies of your Social Security card, birth certificate, and passport.

If you are a foreign national, keep all documents related to your entrance into the U.S., such as a passport, Green Card, and I-94.

Are you married? If so, keep your marriage certificate on file, which may be needed in case of a name change, insurance benefits, and a joint mortgage. If you have a pre-nuptial agreement, store the original in a safe place.

Keep any divorce papers in your permanent records.

If you served in the military, keep your discharge papers in your permanent files.

Do you have estate-planning documents such as a will, trust, or Powers of Attorney? The originals should be kept in a safe place, with copies given to people who will act for you such as your agents, Executor, and Successor Trustee. You should also keep a record of your Advance Directive and latest beneficiary information (for retirement accounts and life insurance policies).

If you have a safe deposit box, you should have someone you trust also be a signer on the box and have a key, as banks will not allow anyone not on the account to access the box, even in the event of your death.

Asset & Debt Related Documents

If you have investment accounts, keep your most current statement on file. The previous year’s End of Year statement should be kept until your tax return is completed. If you own investments purchased before 2012, keep records of what you paid in the event that you sell them, as those were not tracked.

If you have retirement accounts, keep a record of any contributions or withdrawals. If you made a Roth conversion, keep those records permanently. If you made non-deductible contributions to an IRA, keep Form 8606 until the account is fully withdrawn.

If you own a business, keep the Federal EIN, business formation documents, ownership agreements, and any business licenses. Also keep payroll records, tax records, receipts for expenses, invoices, deeds, titles, and records of employee benefits such as retirement plans.

If you have any debts such as student loans or mortgages, keep the loan documents until the loan is paid off, and then permanently keep a record of paying in full.

All deeds, titles, settlement statements, or bills of sale on property should be kept until you sell the property. Also keep a record of any fees or expenses that should be added to the basis of the property (remodeling expenses, improvements, etc.).

If you own property in multiple states, keep detailed records proving which state you lived in for the majority of the year (receipts or travel itineraries). This can be critical in establishing residency or for state tax liability.

Other Documents

Keep diplomas or certifications proving that you completed higher education coursework.

Keep insurance policies (homeowners, disability, auto, life insurance) that are current and in force.

If you have any employment contracts or non-compete agreements that are current, keep those as long as the term lasts.

Finally

Keeping these guidelines in mind won’t eliminate the need for files, but it can at least help reduce the clutter, whether paper or digital.