Continuing from our last post where we talked about defensive strategies to protect your wealth on your Financially Independent Retirement path, it is also worth considering taking out Umbrella Insurance and looking at optimizing Retirement Asset protection strategies as part of your FIRE fortress protection.
Sadly it’s a very litigious society in which we find ourselves these days and given that a lot of people do not manage their finances very well any injury incident can be a great opportunity for someone to get ahead financially at your expense. There is also a whole industry of lawyers waiting to assist them in this process, the act of defending yourself alone against a frivolous lawsuit can set you back thousands, delaying your path to Financial Independence or even jeopardizing it and forcing you back to full time employment if you are already retired.
Since our first 3 year landlord experience with a property we owned back in North Carolina we have always used Umbrella Insurance where we have taken coverage to about 2 million dollars. Ironically the closest we came to needing this was actually after the tenants had vacated the property and we had it on the market for sale. There was about a 10 inch step down between the kitchen going out to the garage conversion which we had always meant to build a step into, one of the realtors showing someone around fell at this location breaking her ankle in two places and required two surgeries. We were horrified and couldn’t believe something this bad could have happened to someone on our property but it also reminded us just how easily this type of thing could happen at any property we own and how someone could see this as an opportunity for a lawsuit.
Unfortunately this is how society has us conditioned to think, the same applies immediately after checking if everyone is ok after a road accident, where do people’s minds generally wander? To the litigation and blame stage whether there is blame to be found or not. This is just how life is now, establishing blame so that the lawyers can decide who they are going to go after. If you are the fiscally responsible Financially Independent one then there is a good chance every attempt will be made to lay the fault on you. The best part about Umbrella Insurance is that it removes the feeling that you are on your own in the event you were to ever get sued, it’s like you have brought an ally to the battle that doesn’t want to lose anymore than you do. They are most likely to put up their best fight for your cause even if it is for their own benefit, a definite win for you in protecting you fortress and all for the sum of about $200 per year at our last renewal. That said we have just renewed with State Farm and because we are now car free and no longer US resident we have followed the alternative direction of extending our regular landlords policy to the same high level of protection that we had with the Umbrella policy, this resulted in a $120 saving.
As far as rental property goes an alternative to an umbrella policy is to instead sell it to an LLC or Limited Liability Company set up by you, this would then limit the liability so that any suit is against the business instead of you personally, the downside of this is that any judgement against you potentially leads to you losing the property. Additionally, when we looked into the LLC option we planned to open it from our virtual mailing address in Las Vegas to take advantage of the no state tax or business tax but there are still other hidden fees such as the legal requirement of hiring a registered agent since we do not own physical property in Nevada. The purpose of the registered agent is to accept official mail and process it on your behalf, this just adds more complication to the process on top of the added burden of being required to submit a business tax return for your LLC, in the end we decided the umbrella was cheaper and easier.
If part of your retirement is an employer-sponsored 401k, be it a Simple IRA, SEP, or employee share ownership plan (ESOP) employer backed pension plan then the good news is that the federal government has your back in the from of creditor exemption up to $1M in the event of a lawsuit assuming you don’t owe money to the IRS or child support payments. ERISA or the Employee Retirement Income Security Act of 1974 exists to protect your retirement assets and it is worth referring to the Department of Labor’s website to arm yourself with as much information as possible regarding what is covered or not.
For IRA’s it’s a more complex situation though, according to the Department of Labor you continue to be covered by ERISA if you have left your employer and rolled the 401k into an IRA, but for every other instance there is no guarantee that your plan has creditor protection as this varies state by state according to individual state law. For example, of note at the time of writing the state of California offers no creditor exemption in the event of a lawsuit, so not only is this arguably the worst tax state for retirees it also carries the biggest risk of total loss of retirement funds as you’re trying your best to avoid lawsuits negotiating it’s congested freeways. At least with tax friendly states like Texas and Florida there is more protection, it makes a lot more sense why retirees choose these destinations.
As for all other states it is worth doing the research to establish where your particular state stands with regards to creditor exemption, as part of your FIRE fortress protection we would suggest taking legal advice too to just remove any doubt that there are legal loopholes or get-outs in the worst case.
As usual the disclosure applies, we are not legal experts just regular retirees trying to protect our own assets from what we see as an ever litigious society and as such can only pass on information that we have learned along the way. Every situation is different and what works for us may not work for you, our only advice can be to carry out your own due diligence, taking specific legal advice on any of the subjects covered here.
In conclusion, whether or not you carry Umbrella Insurance or relocate to a tax free state with creditor exemption in order to protect your retirement nest egg is entirely an individual decision dependent entirely on each persons risk aversion. On a personal note we have found ourselves more risk averse in this infinitely more enjoyable stage of our existence but each situation is different.
Thanks for reading