Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a new or experienced investor, these weekly updates are designed to give you specific investment advice. Each Investor Toolkit update gives you a fundamental piece of investment strategy, and shows you how you can put it into practice right away.

Tip of the week: “These 2 retirement planning tips can help you leave a well-organized—and profitable—estate”

As part of their retirement planning, investors sometimes ask us about ways to set up their finances so they can be easily managed after their death.

When you’re doing this kind of retirement planning, it’s always good to have clear arrangements in place and keep them up to date as your circumstances change. Here are two tips you can use to avoid placing undue stress on your loved ones and make the most of the investments you leave to your heirs:

1. Have a clear—but not too rigid—financial contingency plan: This will let someone you trust to take charge of your finances if you can’t handle them yourself. However, it’s best to focus on finding someone you trust thoroughly, and giving that person as much flexibility as possible.
   
   The alternative — leaving fixed instructions — introduces a random element that can only hurt you. After all, fixed instructions (such as “If I get sick, convert all my holdings into T-bills”) won’t add to your wealth. But they may turn out to be inappropriate, and whoever you put in charge won’t be able to do anything different.

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2. Keep your heirs in mind when making investment decisions: If you have substantially more money than you’ll need for the rest of your life, and you plan to leave the excess to your heirs, it makes sense to invest at least part of your legacy on their behalf. That is, invest based on their time horizon, not yours.
   
   For instance, if your heirs are in their 40s, your retirement planning should involve holding at least part of your portfolio in a selection of investments that would suit investors in their 40s. Of course, you’d still want to invest conservatively. But you’d want to take advantage of the many years that 40-somethings have till they reach retirement age.
   
   If your retirement planning involves holding your money in T-bills for the last few years of your life, it will generate a minimal return after taxes — you may actually lose money after accounting for taxes and inflation.
   
   After your death, it may take months or longer to settle your estate. After that, your 40-something heirs may need time to put your legacy to work, especially if they are inexperienced investors. They may have passed 50 by the time they get around to investing in an age-appropriate fashion.
   
   Missing out on, say, three years of even moderate returns can take a big bite out of the funds they’ll have a few decades later, in retirement.

Next Wednesday, March 9, 2011, Investor Toolkit will give you our investment advice on the role of goodwill in your investing strategy.

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