I don’t usually write technical posts, but this one is, more or less, so it needs a big giant disclaimer on the front: I am (OBVIOUSLY) not a financial professional. Please consult someone who actually knows what they’re doing before making any serious moves.
OK, now that we’ve got that out of the way, I’m going to give you some solid advice: whether you’re single or married, make sure your retirement account beneficiaries are properly named and for heaven’s sake, get a will made. [Full disclosure: I’ve done the first, but not the second; it’s on the list for this year.]
Last year, I opened my first-ever retirement account. At the extremely advanced age of 35, I of course immediately started thinking about my imminent death and what would happen to the vast mountain of $$ I’d just sent off to Vanguard. (OK, to the $1000 I’d just sent off to Vanguard.)[*] With an IRA, or, if you’re unmarried, with a 401(k), it’s especially important that you specifically designate beneficiaries, as otherwise the people you want to receive them might well not.[**]
Spouse and children are obvious options for beneficiaries, but I don’t have either of those. My first instinct was to name my parents; that’s what I did with my life insurance policy at my first job out of college, which was the last time I had to designate a beneficiary for anything. But while that was the right choice at the time — if I’d died in my early 20s, they would have needed the money for the funeral and maybe to help pay off my student loans — it’s over a decade later and they are pretty financially secure. Even if I died before them, they don’t really need the money. (If they weren’t in good shape, I would have kept them as the beneficiaries until they died.)
As far as I can tell you can literally name anyone you want on an IRA, down to the postman, as long as you have their name and mailing address and date of birth; if you’re not married, the same is true for a 401(k). I decided that my criteria should be: 1) closeness to me; 2) level of responsibility I feel towards them; 3) likely financial need around the time of my death. This narrowed things down considerably, as I could immediately reject my dentist, my fourth-grade teacher, and Mark Zuckerberg as options.
It turned out to be #2 that was really the deciding factor for me. I don’t feel as responsible for the well-being of my closest friends as I do for that of my immediate family and my godchildren. My parents having been eliminated because of #3, I was really only left with three candidates. So on both my retirement accounts, I named my brother and my two godchildren as equal primary beneficiaries, meaning that if I died tomorrow, they’d each get 1/3 of the account. It would have been possible to name my brother as primary and my godchildren as contingent, meaning that they would only inherit if my brother predeceased me, but I feel responsible for my godchildren and since they will most likely be in midlife, with kids and expenses of their own, when I die, they will probably be able to use the money.
[Edited to add: after publishing this post and reading the comments — thanks guys! — I realized that the situation with naming minor children as beneficiaries is more complicated than I’d understood before. Since neither will be 18 for quite a while, I need to research what the best thing is to do. I may end up naming their mothers, who are my best friends, instead, until they’ve grown up.]
Another important thing about beneficiaries: you have to keep on top of them! If you roll over the account, you need to name them all over again (you can do this on the administrator’s website now, of course, making it much easier than it used to be.) If God forbid one of my beneficiaries dies, I’d need to update the forms. If something major changes in your life — you have a baby, for example — that might be a good reason to disinherit your niece. (Because of this, while I did tell my godchildren’s parents that I’ve named them, I don’t plan to tell the godchildren themselves until many years from now; if I marry, etc, things might change and I don’t want to pull back something they are counting on.)
Assuming no spouse, I have one more question for myself: what happens if another person who fits my criteria enters my life? The most likely case here is a niece and/or nephew, or perhaps another godchild. Splitting the accounts between three people is a little more unwieldy than simply naming my brother, but not that bad. However, things could get absurd quickly. I really do need to write a will and I’ll probably ask the lawyer what he/she thinks, but my instinct is that I’d rearrange things so that two people split one account and two split the other (if they’re roughly equal sized) or my brother’s the sole beneficiary of the smaller account and the three theoretical godchildren split the larger account. In any case, this is clearly a living (hah!) question — as my life unfolds the answer to the question “who’s your beneficiary” may change any number of times.
[*ETA: I told my brother he was going to get just enough inheritance to buy a suitable mourning robe.]
[**401(k) plans have more protection built in for spouses — if you want to name someone else as the beneficiary, your spouse has to sign a form, and if you die without naming a beneficiary it ought to, as I understand it, go to your surviving spouse anyway — but IRAs are different. There’s no automatic beneficiary, and rules vary from administrator to administrator about what to do with an undesignated IRA. You want to sidestep all that by naming the person/people you want. Here’s a little more info on the inheritance rules, though they’re always subject to change with the law.]