An old adage advises to expect the unexpected. This applies in retirement planning as well. You can’t anticipate every risk that may befall you, but you still can have contingency plans. It’s common in retirement planning to consider risks such as stock market loss and inflation. But a risk that pre-retirees often forget to plan for is, well, losing it.
As we age, the risk of cognitive decline increases. Call it diminished capacity, dementia, or simply slowing down mentally — whatever you call it — it’s a retirement risk. Your inability to manage your own health and finances can seriously alter the quality of your life in retirement.
The good news is there are a lot of ways to plan for the risk of diminished capacity without giving up control currently. The following 10 strategies can help you address the risk of cognitive decline so, if something happens, there are procedures that will lessen your burden, and the burden on your loved ones.
1. Medical Power Of Attorney
When you’re unable to make your own healthcare decisions, a Medical POA (present on admission) allows a trusted individual to step in and make the necessary decisions for you. Most states have fill-in-the-blank powers of attorney, but you may request an attorney-drafted document if you want to define how incapacity will be determined, the extent of your agent’s powers, etc.
Also, be sure to provide your agent (the person who will act on your behalf) with HIPAA authorization. This assures that medical professionals are allowed to provide your agent with the information needed to make an informed decision on your behalf.
2. Living Will
Sometimes called an “advanced directive,” a living will is your chance to communicate what medical procedures you want, or don’t want, taken — particularly in life or death situations. This is where you can let the hospital, your agent under the Medical POA, and other interested parties know your desires in end-of-life circumstances.
Do you want a “do not resuscitate” order? If you’re in a vegetative state, do you want the feeding tube withheld? What about use of a respirator? You can complete this document while you’re still in a position to communicate your desires, giving you peace of mind that your family and medical team will know your wishes.
In some states, this document can be reinforced by completing a POLST (physician-ordered life-sustaining treatment) form. Having both a living will (created in advance) and a POLST (made when you’re going in for surgery) is a “belt and suspenders” means of having your desires heard.
3. Financial Power Of Attorney
A Financial POA appoints a person to act on your behalf with regards to your wealth versus your health. This POA can differ from the Medical POA in several ways. First, it often provides more detail on what specific decisions can be made by your agent, as well as which ones cannot. States vary widely on how these decisions are designated, but a common means is to check off normal financial powers that are assumed to be permitted through a standardized form; for example, paying bills and managing assets.
If you want, you can also add so-called “reg flag” powers such as the ability to donate to charity or allow the agent to give gifts to family members. Another issue is when you want your financial POA to take effect — now or only when you’ve lost financial capacity? Many states allow the POA to be “springing.” In other words, the power only springs into existence when you become incapacitated. Like a Medical POA, there are standardized forms available, or you can choose to use an attorney-drafted form if you have special issues to cover.
Contrary to popular opinion, trusts are not just for the rich and famous. Giving a trustee the power to make financial decisions for you, if you have a serious cognitive decline, is a powerful tool. The law allows an extraordinary amount of discretion in drafting the terms of both when and how you want the process to work.
A common approach is to have you start as the trustee of your own trust, but also designate a successor trustee who will take over if you’re unable or unwilling to continue managing your trust assets.
You can be very specific as to how incapacity is defined, what powers the successor trustee can exercise, and who has oversight. For example, if you’re concerned about giving up control, you could require in the trust that a team of three doctors determine your incapacity before the successor trustee can take over.
5. Social Security Representative Payee
This one is a no-brainer. When you file for your Social Security retirement benefit, one of your options is to indicate a Representative Payee in case you become incapacitated. This is more important than it may sound. The Social Security Administration (SSA) does not accept POAs from benefit recipients.
If you lose legal capacity, the SSA looks for another party to act as payee. By indicating in advance who should represent you and receive your benefits, it avoids the disruption and potential fraud that might otherwise occur.
6. FINRA Trusted Contact
If you lose mental competency, you may be the last person to actually know it. Your advisors may suspect your decline well before you are aware of it. Accordingly, the securities industry requires brokers to ask an investor for the name of a trusted contact person when opening or updating an account.
The rule is intended to help the financial advisor have an identified party to make contact with in the event of client incapacity or when there is suspected elder abuse. This is your opportunity to address now a contingency that may occur later. While you’re still in control, make sure there’s a process for a trusted party to be contacted if there’s suspicion that you’re failing or that someone is taking advantage of you.
7. Intention And Permission Statements
You can protect your future in retirement by letting your advisor team know your wishes in the event of incapacity, including who to contact. This is best accomplished by giving your trusted advisors both a verbal and written intention and permission statement.
There is no standardized approach to this statement, but the basic idea is that you inform your advisors, in writing, who should be contacted in the event of a suspected incapacity. Similar to the “FINRA Trusted Contact” form above, this is a way to let your attorney, accountant, or banker know who to contact if trouble is brewing.
A court-appointed guardian may be required in situations where your diminished capacity is a significant concern. As we saw with pop-star Britney Spears, guardianship can be controversial. The ward may be unhappy with the appointed guardian and yet have no say in the matter.
Recognizing this contingency, many states allow an individual, while still legally competent, to pre-designate who they wish to serve as guardian should the need arise. If you’re concerned about a future guardianship — and who would be your guardian — consider pre-designating a trusted party.
9. Personal Care Agreement
In many cases, diminished capacity simply means you need help from a family member with day-to-day activities. An idea growing in popularity is to execute a caregiver contract with a trusted adult child who lives with or near you. Commonly called a “personal care agreement,” this contract can be structured several ways, but the basic concept is to pay your child for the caregiving they provide.
Formalizing this arrangement has several advantages. First, it may help you deduct some of your medical expenses. Perhaps more importantly, it can preserve family harmony by separating compensation from an inheritance. Your caregiving child is paid for his or her services, but can also share equally in the family inheritance.
10. Simplifying Your Products And Procedures
Diminished capacity is a common condition associated with aging, but it does not necessarily mean that you’re incapable of handling your own finances. A handy means of extending your ability to manage your wealth in retirement is to simplify your financial footprint. Consolidate your accounts, automate your payments, and err towards easy-to-understand (and manageable) products.
For example, you might convert some of your investments into a stream of monthly payments in the form of an annuity. Anything that makes financial matters easier to comprehend — and work with — means you can handle your own finances for a longer period of time in retirement.
In retirement, we all worry about decreasing markets and increasing expenses. But a risk that is ever-present as we age is the possible decline in our mental faculties. Rather than just accept the risk, you can take steps to get out ahead of this concern and have a plan. Even if you inevitably lose your ability to handle your health and wealth, you can have a process in place that assures your protection.
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