Financial Planning for Major Changes and Transitions in Your Life

Major changes and transitions in life often increase the need to focus financial planning.  There are many common events that people go through that result in the need to update or change their financial plans. These events can come along with emotional joy or distress and, if plans are put in place, can have a large impact on the financial future. Changes can include significant changes to one’s career path (income), divorce or marriage, birth of a child, receiving an inheritance, or death of a partner or spouse.  All bring the need to develop or revise your financial plan to achieve your goals. While it is human nature to procrastinate dealing with stressful or unpleasant situations, such delays can soon adversely impact your financial security.  It is important to understand that being proactive and seeking advice early can have far better outcomes than waiting until it may be too late.  

Major life events and changes can result in new financial responsibilities and sudden increases or reductions in income, net worth, and portfolio value. How you respond to the new responsibilities can have a significant impact on the future.  The potential risks and rewards of increased or lost income are critical at every stage of life. When you go from two incomes to one, you will need to update your overall financial plan, investment strategy and estate plan. It’s important to walk through all the hypothetical scenarios which could happen, and create a plan for financial protection.

For example, if you are getting divorced, you may find you’ll have to live on less than you anticipated. The first thing to do will be to create a budget that works toward your individual short-term and long-term goals. You may also have to consider working longer than expected. These are reasons why financial planning can become crucial in late-life divorces. Taking into account many factors, retirement plans such as 401(k)s, IRAs, and even pension plans may be divided or awarded to one party. Some factors that affect the settlement may include the dates when the accounts were established, state laws regarding separation and marital property, and any agreements dictating the terms for separation (such as a prenuptial agreement). For spouses who weren’t actively participating in their finances during marriage, it is important that they take the lead when it comes to their long-term financial planning and investing.

Whether you’re planning to make a lateral career move or start a new career path, the transition period between careers can also be filled with financial uncertainty. Planning ahead for this can decrease risks and help reach long-term financial goals. People often ask themselves what to do with a 401(k) when changing jobs. One option is to simply keep your old retirement plan with your former employer. You also have the option to “roll over” or move the assets to another account that better suits your goals and needs. You can accomplish this through a rollover IRA or Roth IRA at an independent investment firm or you may be able to transfer assets to your new employer’s plan.  

With respect to restricted stock or stock options prior to leaving an employer, you should review your grant agreement or consult with your employer regarding terms and conditions of the award. There are different restrictions and liabilities depending on the type of equity award you have.  Under most circumstances, there is an opportunity to exercise vested stock options after your end date with your employer. However, this depends on the terms of your award. It is important to understand the impact on your finances before you make any decisions.

The unfortunate death of a family member is another circumstance that requires planning. Lump-sum payments or assets may be passed on to family members.  There can be significant downside to an inheritance. It is estimated over 90% of children who inherit immediately fire their parents’ financial advisors, according to Fidelity and the Institute for Preparing Heirs. This leaves many heirs squandering their windfall money on new cars, clothes, homes and vacations instead of paying off debts and investing to ensure their wealth lasts.

IRA and 401(k) inheritance rules differ depending on whether the beneficiary is a spouse of the original account holder. This is because a surviving spouse may take their deceased spouse’s IRA as their own IRA or as an “inherited” IRA, while non-spouses must take the IRA as an “inherited” IRA.  In addition, there are different rules for inherited IRA withdrawals depending on whether the beneficiary is considered an Eligible Designated Beneficiary (spouse or minor child of the original account holder, or an individual that is disabled, chronically ill or no less than 10 years younger than the original account holder), Designated Beneficiary (most other individuals), or Non-Designated Beneficiary (trusts and organizations). Regardless of the type of retirement plan you inherit and your relationship to the decedent, there are a list of rules you will need to become acquainted with.

Some actions you may need to take to be ready for life transitional changes include:

List all income and expenses to see where you stand financially.

Take inventory of all shared and individually owned assets.

Re-title accounts, assets, and real property to be held individually or jointly.

Start thinking about how best to divide retirement account assets.

Revise your estate plans, including your wills, trusts, powers of attorney, and health care proxies.

Update your saving and investment strategies based on your views as a couple on your new goals and risk tolerance.

Reduce debt and/or save more for the future.

Set aside more for your beneficiaries via gifts to trusts.

Update and refine your investment strategy.

Continue saving and investing for your retirement.

Life transitions happen whether we want them to or not. Financial independence is important no matter what your circumstances. This means establishing your own credit, ensuring you have the right accounts and investments, and preparing for your own retirement. In these instances it can be important to have appropriate contingency plans in place that keep you on track and change along with your circumstances.