Taking control after spouse’s death
It’s best to ease into the role of family money manager
Before he died this spring, Iris Bloom’s husband was the family investor. As Bloom, a quality engineer and Newton resident, explained, “He did all the money management, and he did pretty well.’’
Now Bloom, who was always far more fiscally conservative than her husband, is taking over the family finances. She’s already decided to have a professional manage the combined retirement account portfolio. But she didn’t want to be saddled with management fees on the rest of the family assets.
Besides, she figured, it was time to learn some money management skills herself. So Bloom, 48, decided that a Boston Globe Money Makeover would be a good way to start her education. “I want to do some of it on my own,’’ she said. “It was never that I felt I wasn’t smart enough to do it. It was because he had fun playing with it.’’
When she sat down with fee-only financial adviser Cheryl Costa, Bloom focused the makeover on the $450,000 in life insurance benefits from her husband’s death. Taking as conservative an investment approach as possible, she wanted to use the money - which she called “my safe money’’ - to make up the difference between her $78,000 annual salary and the cost of supporting herself and her two teenage children.
“When I came into this process, my idea was to just stick it in a bank account and draw it down as I needed,’’ she explained.
Why so conservative? The past year’s market volatility had taken a toll. When the market began its dive in 2008, the Blooms’ aggressive portfolio took a big hit. “I was always worried something like that was going to happen,’’ Bloom said. “Then it did.’’
But Costa, head of AFW Wealth Advisors’ Natick office, said that a super-conservative approach would leave Bloom far short of her target. Given current expenses, Bloom will need to draw between $3,400 and $3,800 a month from those insurance funds to make ends meet. Over the years, that means she’ll need an annual return of just over 7 percent in order to make the insurance money last until retirement, which she plans to finance with other assets.
“A diversified portfolio would throw off that kind of money,’’ Costa explained. A portfolio of municipal bonds and other fixed-income investments, however, would likely produce closer to a 4 percent return. And if Bloom opted for a bank account, she’d find herself with a return of less than 1 percent.
Factor in taxes and inflation, Costa said, and “safe’’ investments like bank accounts and bonds start looking a lot less attractive. “It is important to understand that these investments are not without their own risks,’’ she said.
To make the money stretch nearly two decades, Costa said, Bloom has to either significantly cut her expenses - perhaps by moving to a less costly home - or add some equities to the investment mix. Her recommendation: A diversified portfolio of mutual funds with at least a 35 percent exposure to equities.
“I consider this a very conservative portfolio,’’ she said.
To improve the chances of hitting that 7 percent mark, Costa said she’d like Bloom to boost her equities exposure to 40 percent or more. With 40 percent allocated to equities, Costa recommended that the remaining assets be invested 30 percent in corporate bond funds, 20 percent in municipal bond funds, and 5 percent each in a high-yield bond fund and a money market fund.
Bloom eyed the proposed equity allocation with some skepticism.
“Forty percent seems a little high to me,’’ she said. “Perhaps 20 percent.’’
Still, that 20 percent was already a long way from her initial “under-the-mattress’’ thinking on the matter. “What has really surprised me is that I can be very conservative and still get some return,’’ she said.
Having gone through a long illness with her husband, Bloom also wondered if she should buy long-term care insurance.
“You are a little on the young side,’’ Costa said, noting that people typically don’t start shopping for such insurance until they are in their 50s and 60s.
But since Bloom is now a single parent, she no longer has the backup provided by a spouse, Costa said. Another consideration: “The younger you are when you buy it, the cheaper it is,’’ she said, noting that Bloom might want to investigate her options.
Even as Costa presented Bloom with her recommendations, she told the newly widowed engineer to take her time easing into her new role as family money manager.
“I generally advise new widows or widowers to postpone any big decisions for at least one year,’’ she said. “That includes even those decisions that seem fiscally prudent - like paying off a mortgage.’’
Bloom will gradually become more comfortable with her new financial responsibilities, Costa said. And since Bloom has enough other assets to cover emergencies, retirement, and the children’s education, she isn’t under any pressure to act quickly.
With her new plan in hand, Bloom was ready to start on her homework, researching the recommended funds and considering the proposed investment mix.
“I need some time for this to soak in, but this is definitely better than my original plan,’’ she said. Clearly, she was already moving forward.