What Will Happen if There’s a Market Crash During Retirement?

Let’s use the market crash of 1987 as an example for this discussion on “What are the odds the market will crash during your retirement years?” from Market Watch. It’s not as famous as the deep dives of the 2008 markets, but it was actually the worst in U.S. stock market history. While some people believe it was not that significant, and that government safeguards would have prevented the crash if it was really that bad, those arguments may not be right.

A study released from Harvard and Boston University came up with a formula that predicts the frequency of stock market crashes over extended periods of time, “Institutional Investors and Stock Market Volatility.” If these extremely learned sources are correct, then we should all understand that market crashes are events that will continue to occur, regardless of any other factors.

For this analysis, imagine a person retiring at age 65, with a generous life expectancy of 30 years. Let’s look at the scientists’ formula for the chances of a market crash during that person’s retirement. Note that the bigger the size of the crash, the lower the probability of one occurring. However, the odds of a huge crash are still high enough that we should expect one, and perhaps more than one, during any given person’s retirement.

Consider first a 15% daily drop, which would be a decline of around 4,000 points in the Dow Jones Industrial Average. There’s a 67% chance that this will happen at some point during a 30-year retirement. Note that the formula does not mean that crashes of this size happen like clockwork every so many years. The formula predicts what the average frequency of crashes will be over an extended period of time. You may never see a 15% crash—but your planning is on shaky ground, if you have set your retirement investments up with no consideration for a big crash.

What would such a drop do to retirement finances? The answer is different for everyone, depending on how their equity portfolios are structured, how much cash on hand you have and if you are able to dramatically change your spending when your portfolio loses value.

However, a bigger impact could be the psychological response to the drop that many people, unfortunately, are quick to make in the face of a crash. Going to all cash is the worst thing that anyone could do, and yet people do it, time and time again.

According to the professor’s formula, we should expect as many as 18 daily drops of at least 5% in the years during our retirement. Over the last thirty years, there actually have been 15 such daily drops. It is slightly slower than the prediction but still, remarkably close.

What can you do to prepare for these inevitable events? Be aware that one or more stock crashes will likely occur during the course of your retirement. Don’t panic when they occur, and depending upon on your risk aversion, do what you need to in order to position your portfolio, so you can sleep at night.

Reference: Market Watch (October 31, 2019) “What are the odds the market will crash during your retirement years?”

Suggested Key Terms: Retirement, Market Crash, Investments, Portfolio

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Blended Families Need More Thoughtful Estate Plans

Estate planning for blended families is like playing chess in three dimensions: even those who are very good at chess can struggle with so many moving parts in so many dimensions. Preparing an estate plan requires careful consideration of family dynamics, and those are multiplied in blended families. This is another reason why estate plans need to be tailored for each family’s circumstances, as described in the article “Blended families have unique considerations in estate planning” from The News Enterprise.

The last will and testament is often considered the key document in an estate plan. But while the will is very important, it has certain limitations and a few commonly used estate planning strategies can result in unpleasant endings, if this is the only document used.

Spouses often leave everything to each other as the primary beneficiary on death, with all of their children as contingent beneficiaries. This is based on the assumption that the second spouse will remain in the family home, then will distribute any proceeds equally between the children, if and when they move or die. However, the will can be changed at any time before death, as long as the person making the will has mental capacity. If when the first spouse dies, the relationship with the surviving children is not strong, it is possible that the surviving spouse may have their will changed.

If stepchildren don’t have a strong connection with the surviving spouse, which occurs frequently when the second marriage occurs after the children are adults, things can go wrong. Their mutual grief at the passing of the first spouse does not always draw stepchildren and stepparents together. Often, it divides them.

The couple may also select different successor beneficiaries. The husband may name his wife first, then only his children in his will, while the wife may name her husband and then her children in her will. This creates a “survival race.” The surviving spouse receives the property and the children of the spouse who passed won’t know when or if they will receive any assets.

Some couples plan on using trusts for property distribution upon death. This can be more successful, if planned properly. It can also be just as bad as a will.

Trust provisions can be categorized according to the level of control the surviving spouse has after the death of the first spouse. A trust can be structured to lock down half of the trust assets on the death of the first spouse. The surviving spouse remains as a beneficiary but does not have the ability to change the ultimate distribution of the decedent’s portion. This allows the survivor the financial support they need, giving flexibility for the survivor to change their beneficiaries for their remaining share.

Not all blended families actually “blend,” but for those who do, a candid discussion with all, possibly in the office of the estate planning attorney, to plan for the future, is one way to ensure that the family remains a family, when both parents are gone.

Reference: The News Enterprise (November 4, 2019) “Blended families have unique considerations in estate planning”

Suggested Key Terms: Blended Family, Estate Planning, Estate Planning Attorney, Last Will and Testament, Trusts

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What is a Special Needs Trust?

Supplemental Security Income and Medicaid are critical sources of support for those with disabilities, both in benefits and services.

To be eligible, a disabled person must satisfy restrictive income and resource limitations.

That’s why many families ask elder law and estate planning attorneys about the two types of special needs trusts.

Moberly Monitor’s recent article, “Things to know, things to do when considering a special needs trust,” explains that with planning and opening a special needs trust, family members can hold assets for the benefit of a family member, without risking critical benefits and services.

If properly thought out, families can continue to support their loved one with a disability long after they’ve passed away.

After meeting the needs of their disabled family member, the resources are kept for further distribution within the family. Distributions from a special needs trust can be made to help with living and health care needs.

To establish a special needs trust, meet with an attorney with experience in this area of law. They work with clients to set up individualized special needs trusts frequently.

Pooled trust organizations can provide another option, especially in serving lower to more moderate-income families, where assets may be less and yet still affect eligibility for vital governmental benefits and services.

Talk to an elder law attorney to discuss what public benefits are being received, how a special needs trust works and other tax and financial considerations. With your attorney’s counsel, you can make the best decision on whether a special needs trust is needed or if another option is better, based on your family’s circumstances.

Reference: Moberly Monitor (October 27, 2019) “Things to know, things to do when considering a special needs trust”

Suggested Key Terms: Estate Planning Lawyer, Asset Protection, Probate Attorney, Special Needs Trust, Disability, Elder Law Attorney, Supplemental Security Income, Medicaid

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