With all the financial decisions Americans are called upon to make for themselves these days, it's easy to understand how some -- the kind that don't seem that urgent -- get overlooked.
One such area is deciding on beneficiaries for your pensions, individual retirement accounts and life insurance. And not just choosing them but updating them periodically.
Beneficiary designations are key not only to where a lot of your money will go, but in many cases to how it will be treated for tax purposes. An out-of-date or missing beneficiary designation on an asset can, for example, force the asset to go through probate at your death or cause it to receive less favorable tax treatment -- pain that would have been averted or greatly eased by a simple review.
Beneficiary designation or updating "can very easily slip through the cracks," said Marc S. Freedman of Freedman Financial in Peabody, Mass.
How easily? Freedman said that in his financial planning practice he recently encountered a prospective client "in his fifties [who] still had Mom and Dad listed as his beneficiaries."
People can go to work for a company, stay there many years, and simply forget what they wrote on beneficiary forms for retirement plans and group insurance when they were single and in their twenties, Freedman added. "As couples get married they oftentimes forget to name their spouse on retirement accounts," he said.
Freedman and other experts say it's a good idea to check over your beneficiary designations every few years, and bring any laggards up to date. This is especially true if you have been through a major change in your life -- marriage, divorce, birth of a child -- or if you have reached the age at which retirement is on the horizon.
In fact, retirement plans are a good place to start.
If you have a traditional pension, talk to your employer's benefits office about any elections you need to make, and their consequences.
With 401(k) plans, IRAs and the like, a key benefit for a survivor is the ability to stretch withdrawals out as long as possible, maximizing the benefit of the tax-deferred (or tax-free, in the case of a Roth IRA) compounding. A surviving spouse can roll a late spouse's IRA over into the survivor's, and withdraw it over his or her life expectancy.
Failing to name an IRA beneficiary can trigger the so-called five-year rule, meaning the account would have to be paid out within five years. This isn't always the case -- often the custodial agreement the account holder had with the mutual fund or bank that holds the account will have a default provision naming a surviving spouse, if there is one, or children. But it's much better to name a beneficiary or beneficiaries. It's a simple matter of filling out a beneficiary designation form and sending it to the custodian.
Then there's life insurance.
Life insurance death benefits pass directly to the named beneficiary, a process that is usually nice and clean, and fairly prompt. However, in the absence of a named beneficiary, proceeds are likely to end up in your estate and go through probate. Probate isn't the headache it used to be in most jurisdictions, but it's still worth bypassing where that can be done simply.
Generally, if you buy life insurance, either "permanent" or term, the agent or carrier will ask you to name a beneficiary. But you should remember to keep it up to date.
Many employers provide "group term" life insurance to their workers, either automatically or as an optional benefit. This insurance typically remains in force only as long as you are with the company but can be very beneficial if you die while employed. Check with your employer and see if you have coverage; if you do, make sure the beneficiary is up to date. Again, it's simply a matter of filing a form.
Finally, retirement plans and insurers generally won't pay benefits to a minor child, so if you want to them to go to a child, you'll need a custodial or trust arrangement. For that, get professional advice, from a planner or lawyer.
Interest rates on government-guaranteed education loans -- Stafford loans for students and PLUS loans for parents -- are due for their annual reset this month, and although interest rates generally have turned up recently, lender Sallie Mae figures that students and their families may still see a slight decline.
Education loan rates are based on the last auction of the 91-day Treasury bill in May -- scheduled for tomorrow -- plus a margin. Based on last Monday's T-bill rate of 1.06 percent, rates for students in school would drop to 2.76 percent from the current 2.82, and loans in repayment would fall to 3.36 percent from 3.42. New rates take effect July 1.
Education loan rates have dropped nearly five percentage points over the past three years, and are currently at historic lows. Student loans generally adjust annually, but borrowers with multiple loans can consolidate them into a fixed-rate note. If Sallie Mae is right, it means eligible borrowers who haven't taken advantage of this feature still have a chance to lock in a very low rate.
High-income Medicare beneficiaries who opt for Part B outpatient coverage are headed for a nasty surprise in the coming decade, according to the Employee Benefit Research Institute. Those who now pay annual premiums of less than $800 for Part B will see their costs rise by approximately $3,000 by 2011, according to EBRI's analysis.
The changes are mandated by the Prescription Drug and Medicare Improvement Act of 2003, which became law late last year.
In the past, beneficiaries who signed up for Part B have paid a premium equal to 25 percent of the program's cost. But the new law requires seniors with incomes of $80,000 and above to pay more of the cost. For those in the top group, with incomes exceeding $200,000, the federal subsidy, paid out of general revenues, will decline from 75 percent to 20 percent.
At the start, only about 3 percent of seniors will face the higher premiums, but this percentage is projected to double by 2013.
Most Medicare beneficiaries have much lower incomes, however, and they will see their annual premiums increase by only about $400.
The average American is planning to spend $2,252 on vacations this summer, down 5.3 percent from $2,378 in 2003, according to a survey by Myvesta, a nonprofit consumer education organization in Rockville.