By Byron Moore, posted March 1, 2017
Originally published in the News Star and the Shreveport Times on Sunday, February 26, 2017.
Q: What will happen to money remaining in my 401K if I die? Does the company get that?
A: The good news is no, the company doesn’t get it. The bad news is…what do you mean “if”?
A 401K account has a beneficiary designation, meaning you get to decide before you die who gets anything remaining in it when you die. This is most often your spouse, but even if that’s the case, be sure you name a “contingent” beneficiary – meaning someone who gets the money if your spouse dies with or before you.
Remember that anything with a beneficiary designation – a 401K plan, an annuity, a trust or a life insurance benefit – is not directed by what your will does or does not say. So in the event of a death, divorce or other change in family status, be sure you not only change your will, but also all your beneficiary designations.
While you are thinking about the ultimate disposition of your earthly wealth, it’s helpful to remember that all money you are saving now for your future will ultimately fall into one of four categories.
1. Income wealth. This is wealth you will spend, either during your working years or during retirement. Obviously, if you spend it all during your working years, you’ll have precious little when you do retire.
2. Contingency wealth. This is wealth you wisely set aside to be spent “just in case” a need arises that is beyond what your income wealth can handle. That could be just in case of a good thing (opportunity) or a bad thing (emergency).
3. Eroded wealth – that is wealth that is eroded along the way by taxes, inflation, market fluctuations, lawsuits, bad choices, medical expenses, long-term care expenses, etc. Some of this erosion is unavoidable. But much of it can be reduced with some forethought and planning.
4. Legacy wealth – These is what is left that you did not spend for income, contingencies or have eroded away.
There is a finite amount of wealth to go around – so taking from one category to “feed” another is simply a re-allocation of your wealth – for better or worse.
I don’t know anyone who says, “Hey, could you add some more to that erosion category?”
But when it comes to the other three, different combinations are important to different people. Some are very focused on maximizing their own income in retirement. Others want to leave as much for the kids (and grandkids!) as possible. Still others worry that something unexpected (or unwanted) like the cost of a long-term chronic illness will drain their resources too quickly.
Depending on what is important to you, your plan for accumulating and managing wealth may look very different from someone else. That’s fine. You are not someone else. You are you.
Everybody knows you can’t take it with you.
So best to decide what you want to do with it while you’re here, and once you’re not.
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