Almost 60% of people saving for retirement are making an easy-to-fix mistake: They haven't named a beneficiary on their accounts. That's according to a June analysis of 25 million active retirement plans by Fidelity Investments, the largest provider of workplace retirement plans.
If you want to make sure your money will go to the right people when you die, naming a beneficiary for assets like your retirement accounts and life insurance policy is key. That's because the beneficiaries listed on certain accounts trump even what’s written in your will, if you have one.
Failing to add that info and keep it up-to-date sets you up for missteps like your money going to an ex-spouse following your death.
“This is one of those forms that doesn’t seem important, but it’s perhaps the most important document in all of your financial planning,” Kristian Finfrock, founder of Retirement Income Strategies in the Madison, Wisconsin, area, told Grow earlier this year.
Picking a beneficiary is surprisingly easy to overlook when signing up for a new account. And many people forget to change beneficiaries after major life events like marriage, divorce, a new baby, or a death in the family.
Luckily, this is one of those easy financial tasks to tackle: It can take just about three minutes to add beneficiary information to one of your accounts. Here's what you need to know.
A number of different financial accounts may have the option for you to list a beneficiary, including 401(k)s and other workplace retirement accounts, IRAs, life insurance policies, and annuities. Again, this information overrules any instructions in your will, trust, or divorce agreement.
Even if your situation is simple — you want your spouse to inherit everything, for example — you still ought to name an account beneficiary. If you don’t list one at all, your money will become part of your estate when you die. In that case, your family may encounter delays accessing the money or it may not go to the people you want it to. There can be other complications, too.
“Understanding how your assets will transfer after your death will help ensure that your wishes are ultimately fulfilled,” Jill Fopiano, president and CEO of O’Brien Wealth Partners in Boston, told Grow in April.
What’s happening in your personal life will dictate how often you update your beneficiaries. It’s important to review your accounts any time there’s a major life event — you get married, divorced, remarried, have a child, or when a beneficiary dies.
It’s also a good idea to check that you made designations in the first place. You should select beneficiaries when you set up a new account, but that may not be a required step.
And don’t stop with a primary beneficiary, Finfrock recommends. Add what’s known as a contingent beneficiary — that’s someone who serves as a second choice if the first choice won't work.
Video by Jason Armesto
For months, I had ignored this note at the top of an old workplace retirement account: “Add beneficiaries to your workplace savings plan: An important part of your plan for the future may be missing.” Gulp. I set up this account more than two years ago — how had I blown this off?
As is the case for many people, designating a beneficiary wasn't a required step when setting up this 401(k) account. Here are the steps I took to finally remedy this oversight:
- After navigating to the beneficiaries section on the website, I found the option to update my entries.
- I then supplied the name, relationship, and date of birth for my designated beneficiaries. Depending on the account in question, you may need to provide additional details including a beneficiary’s Social Security number and contact information.
- I decided how to split my account balance among my primary beneficiaries, named contingent beneficiaries, and finally, checked a box to consent to the change.
That's it — in less than three minutes, I fixed this financial mistake. After seeing just how easy this was, I logged into my other accounts to make sure my beneficiaries are up-to-date. Good news: They are!
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