A new widow needs to take action
Unforeseen life changes can be financially devastating for families. This week, we look at the case of a widow dealing with her finances and the decisions she and her husband made while he was alive.
The situation
Katie, 66, and Kenny, 67, were high school sweethearts and had been married for 47 years in Westminster. Aside from a few temporary positions, Katie had been a stay-at-home mom raising their four children. Kenny, a retired government employee, died a few months shy of his 68th birthday. Prior to his sudden death, Kenny and Katie had selected a pension plan with an irrevocable consequence: The couple was presented with four options, three of which would have continued pension payments until they were both deceased. But Kenny and Katie chose the fourth option that stopped payments with Kenny’s death.
Kenny’s deathwas the result of the sudden onset of a genetic illness that also took his father’s life. In hindsight, Katie realized this should have been the determining factor in choosing Kenny’s pension plan.
At the time of Kenny’s death the couple had $209,000 in Kenny’s 401(k), $116,000 in mutual funds and $75,000 in their bank account. Now alone in their home, Katie decided to have a few home improvements done. She replaced all the windows, doors and siding, at a total cost of $29,000. Katie then consulted with their “insurance
Recommendations
Every penny is going to count for Katie.
The first step is to roll Kenny’s 401(k) into an IRA in Katie’s name, so she is independent of his former and investment guy,” and he recommended she invest the remaining money “conservatively” in annuities and municipal bonds.
Katie is contemplating a reversemortgage, but would love tofinda solution avoiding that option and ap lan that creates the opportunity to eventually leave the home to her children.
A dear friend of Katie’s urged her to get a second opinion and write in to What’s the Plan. employer. Katie can continue collecting Social Security, but the benefit will be reduced by $807 because of Kenny’s death — she can no longer collect both her benefit and his, so she’ll get only the greater of the two.
I recommend a moderate allocation of 50 percent stock and 50 percent taxable-interest bond mutual funds for Katie’s portfolio. Annuities have safety features and provide tax advantages, but also come with big commissions for the broker and high expenses for the investor. Katie will not be in a high tax bracket going forward, so the tax advantage of annuities and municipal bonds are of little value now.
To be sure Katie’s Social Security doesn’t become taxable and she stays in a low tax bracket, I recommend that she withdraw $500 per month from her IRA, and another $400 to $500 from the mutual-fund account. If Katie slowly draws on the IRA, she’ll be able to stay in a low tax bracket indefinitely.
Despite the recent renovations, Katie needs to seriously consider moving to a smaller home. Ideally, she would use the equity in her current home to pay off a smaller, more affordable residence. This would eliminate a large monthly expense and additional home renovations on the current home. Katie also mentioned that Kenny had collected several “toys” over the years, including a truck, boat, trailer, camper, two jet skis and a motorcycle. I recommend selling as many of these as possible for additional cash flow.
These changes will provide Katie with approximately $2,540 to $2,849 per month. If she does not find this income sufficient, she may need to consider a reversemortgage to provide the additional funds needed during her lifetime. Pam Dumonceau has 21 years of experience in the financial planning industry. “What’s the Plan” is not a substitute for actual financial planning or dedicated professional advice. To participate, contact Consistent Values at whatstheplan@consistentvalues.com. Names and identifying information changed to protect confidentiality.