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Should You Get a Prenuptial Agreement?

JFK_JackieOWhether or not to get a prenuptial agreement before getting married isn’t an easy decision.

The advisability of a prenup turns in large part on whether the default law that will govern the marriage if it ends by death or divorce is agreeable.

If you can live with the default rules, a prenup might not be needed.

If the default rules present problems, then a prenup may make sense.

What are the default rules for marriage, without a prenup? In Kentucky, they fall into four main areas: estate administration, alimony, division of property, and liability for your spouse’s debts.

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The announcement this week of the closure of Sweet Briar College after the end of this semester was significant and sad news.

Sweet Briar was pressured by declining enrollment and a deterioration in pricing power. The board’s decision to yield to this trend while the college still has a large endowment to help fund an orderly wind-down is, perhaps, responsible.

Yet it’s still quite painful and abrupt for faculty, students, staff, and alumnae.

Sweet Briar alumnae, reasonably, seem upset that the board took its decision without consulting them.

A more open conversation about how to best serve Sweet Briar’s mission of being a cohesive, rural community for the liberal arts education of young women might have developed options.

I can think of several — a boarding school offering a post-graduate year with transferable college credit, a think tank focused on women’s education, or an intensive freshman year liberal arts program governed by a consortium of research universities (perhaps Southern ones).

These outcomes would have preserved the place and its memories for alumnae, even in changed circumstances. It’s unclear, though, whether those options were considered. Some alumnae are exploring legal options, but it may be too late to do anything effective.

The Sweet Briar story made me think about whether a Kentucky nonprofit corporation could be designed to avoid an episode like the college’s abrupt closure. I think it could be done rather easily.

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Graduate-PlasticsI believe effective life cycle estate and financial planning is anchored in the Quadrant of Facts, Forecasts, Life Stages, and Unexpected Events. Over the past several weeks, ten posts covered a lot of territory about Facts and Forecasts.

This is a pivot point at which we begin exploring planning issues in the first of several Life Stages: Early Adulthood. when one is post-college but still single.

Early Adulthood has several Facts, but the biggest one is Time: you have a lot of it, because your life expectancy is long. Over time, small variances in human capital formation (the driver of future earning power) or savings rate in Early Adulthood compound into very large differences in your Total Income Statement and Total Balance Sheet. Another Fact of Early Adulthood tends to be a relatively low income.

Early Adulthood is invariably a time of Forecasts: Where is the best city to live? Will this person make a good spouse? What career will make you happy? Will your career succeed? Like any Forecasts, these may turn out to be wrong. In Early Adulthood, it’s particularly important to build resiliency into your planning in the event your Forecasts miss the mark.

Career development is one of the two key projects of Early Adulthood (the other is family formation). Three key elements of career development include skills acquisition (making sure you’re good at doing something), career exploration (finding something to do that you like), and networking (coaxing serendipity to work in your favor). Over the years, I’ve identified what I think are three “best in breed” resources for each of these elements.

For those reading this post who are not Early Adults, these books would make great gifts for Early Adults you know (although yes, you will run the risk of being the “Plastics” Guy from The Graduate at presentation time….)

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rc17057Our previous post explored a model of the cost of the promise you make to yourself to fund your retirement, but that model omitted a very important real-world risk: volatile equity markets.

Most recently, the 2008 stock market crash changed many retirement plans for the worse. A 2009 study by the Urban Institute, “What the 2008 Stock Market Crash Means for Retirement Security,” provided a quantitative forecast of the crash’s effects. When the study was published in 2009, it included three scenarios for the stock market: no recovery, a partial recovery, and a full recovery.

With the benefit of six years’ hindsight, we see (happily) that the full recovery scenario they modeled is the one most closely describing the retirement effects of the 2008 crash.

The Urban Institute study quantifies some important (and perhaps obvious) insights:

Higher earners are more exposed to stock market volatility, because they save more, and more of their savings tend to be allocated to equities.

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What Is the Funding Status of Your Personal Pension?

c019718Pause and reflect on what a pension is: income for life after you retire, intended to replace part of all of your employment income.

For retirees in the “Greatest Generation,” pensions were common. For a host of reasons (presented well by Jacob Hacker in his 2006 book The Great Risk Shift) structural changes in the American economy since 1980 have driven traditional defined benefit pensions almost extinct for private sector workers.

Instead, during your years in the workforce, you must build your own “Personal Pension.”

Your Personal Pension payment for each and every year of your retirement is a promise you’re making to yourself, and you want those promises to be fully funded. How much will that cost?

There are several issues to keep in mind as you consider Personal Pension funding levels: longevity, target annual income, and projected investment returns.

I built a model to expRetirement Liabilities Worksheet Resultslore these issues, and the results are summarized in the chart below.

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