Planning beyond the bottom line
In addition to investments, couple need to reexamine insurance, estate
When it comes to money, couples often have a division of labor similar to the one established by Lee and Jane Quimby. During their 50 years of marriage, Lee has managed the portfolio, paid the bills, and calculated the taxes. Jane has been more than happy to let him do so.
The problem: Jane, now 69, never developed the skills needed to take over the finances should something happen to Lee. So when Lee, 75, recently sold his recording business, he decided it was time to simplify, consolidate, and reorganize to make things easier for Jane. He applied for a Boston Globe Money Makeover, saying he wanted to set things up so that they would "automatically work for her" should he die or become disabled.
When the Center Sandwich, N.H., couple met with fee-only financial planner Jill Boynton, however, it be came clear putting things on "automatic" would require more than a portfolio makeover. The Portsmouth-area adviser said the two needed to address issues such as insurance and estate planning.
Long-term care insurance, which would create a financial safety net for the couple should one of them become ill, was high on Boynton's "to do" list. "The product has really grown and developed in the last 25 years," she said, noting that policies now cover things such as home health aides and other kinds of care. As a result, she now recommends that all her clients consider looking at policies when they turn 50.
With New Hampshire nursing homes costing an average of $233 a day, a nursing home stay would put a serious dent in the Quimbys' resources, she said, and could fully deplete their funds in eight or nine years. Since the two could probably buy coverage for about $4,000 a year, she recommended that they talk with an independent long-term care agent who could show them a variety of products.
Estate planning also needed attention. The Quimbys' wills haven't been updated in many years. And they don't have important estate planning documents such as durable powers of attorney or healthcare proxies, which would designate the people authorized to make financial or healthcare decisions should they become incapacitated. Boynton suggested that the Quimbys draw up new estate plans to address these deficiencies while providing Jane with the help she may need.
The new wills, for example, could name a coexecutor who would be able to help Jane settle Lee's estate. Likewise, a joint revocable living trust would not only help the family avoid probate but could be structured to include a co-trustee specifically selected to help Jane manage her money.
Lee was particularly taken with the idea of a revocable trust, which could hold all of the Quimbys' nonretirement assets and be altered during their lifetimes. It would then allow those assets to pass directly to named beneficiaries. Such a trust would not only consolidate assets, he said, but also "it would help Jane if I am gone."
Boynton suggested that Lee organize all the family financial information in one spot. She told him to start by writing a "Dear Honey" letter that would explain what Jane should do with everything from the life insurance policies to the credit cards. The couple also need to review all the beneficiary designations on their Individual Retirement Accounts and life insurance policies.
Thanks to Jane's job as a receptionist with a shopping bag manufacturer, the couple currently earn enough to cover all their living expenses. They also have sufficient assets to cover some big expenses this year, including roof repair.
Once Jane retires, however, the Quimbys will have to withdraw about $30,000 each year from their savings to make ends meet. That's about 4 percent of the couple's $740,000 investment portfolio, a number that bodes well for the Quimbys. Financial planners typically recommend annual withdrawals of around 4 percent, Boynton said, noting studies show that such withdrawals from a balanced portfolio over a 30-year period are unlikely to deplete investment accounts.
"So, I wouldn't worry about retiring," Boynton said.
To get a bit more mileage from their investments and build a more comfortable cushion, however, Boynton recommended some diversification and consolidation. "Your portfolio is conservative, but I would venture to say that it is a bit too conservative," she said. The couple now has 39 percent of their portfolio in equities and 61 percent in fixed income, with certificates of deposit accounting for nearly half of their fixed-income investments.
Once those CDs mature, Boynton suggested moving a chunk of that money to other investments, including an international bond fund, a commodities mutual fund, a large cap stock fund, and a short-term bond fund. "They add a little bit of growth without adding a lot of risk," she said.
To make things easier to manage, Boynton suggested consolidating some accounts. Both Lee's profit sharing plan and his 403(b) plan can be rolled over into his IRA. And when Jane retires, perhaps next year, her 401(k) can be rolled over into her IRA. That would leave the couple with just four accounts.
The Quimbys went home with a long "to do" list. Jane was a bit overwhelmed by all the information. Lee, however, was ready to get started. "I will definitely be taking action," he said. And with a smile, he added, "I'm glad to hear that what I have been doing, which is pretty much hit or miss, is OK."