Knowing whom to trust when it comes to finances can be a daunting task. This week, we look at a couple seeking financial advice but fearful of scams.
The Situation
Ed and Diane will both turn 66 this year, and Ed plans to retire at age 68. Diane retired five years ago with a pension of $2,964 per month.
The couple has two grown children, Tyler and Nick, who are both married. Diane worked for the city of Aurora as a bookkeeper, and Ed sells heavy equipment to dealerships in the Rocky Mountains.
Both Colorado natives, the couple loves spending time in the mountains and built a cabin on the The cabin has been and continues to be with their children, grandchildren and someday, hopefully, their great-grandchildren.
The couple would like the cabin to stay in the family indefinitely for future generations to enjoy. One of their biggest concerns when they contacted What’s The Plan was ensuring that the cabin passed to their children and not their children’s spouses. In the event of a divorce or death, they want to make sure that the property is not divided. They love their children’s spouses, and their kids are both very good with money, but they want to take every precaution necessary.
In addition to the cabin, Diane is concerned about The majority of Ed’s 401k is invested in real estate, and he is comfortable with this. They have also been approached to buy an annuity with Ed’s 401k plan when they retire and would like guidance from Pam on this.
Recommendations
Ed and Diane are smart to create a plan that protects their cabin and its legacy. I recommend that the couple put the property and all of their non-IRA assets into a trust for the family. The investments will then provide the income for taxes and upkeep and protect the property in the event of Nick or Tyler’s divorce or death.
Diane is right — Ed’s 401k definitely needs to be diversified! This account, valued at $462,435, currently has 72 percent invested in one fund. It holds $331,489 in a real estate fund, $81,246 in an S&P 500 index fund, $2,712 in a small-cap fund, $23,461 in a midcap value fund and $23,527 in a midcap growth fund.
I advise the couple to reduce the real estate to 20 percent, and with the remaining funds, invest 30 percent in fixed-income funds, split between two different options provided by Ed’s company, and 10 percent for each of the following: two large U.S. equity funds, two small/mid U.S. equity funds, and one international equity fund.
Their current beneficiary designation on Ed’s 401k is his spouse with his estate as contingent. If both Ed and Diane were to die, the money would be forced out of tax deferral and it would all be taxed within five years. This would cost the family up to $230,000 in taxes. The couple should specifically list Tyler and Nick as contingent beneficiaries.
I recommend they update their wills and explore setting up a trust for the cabin. They began revising their estate plan with their attorney two years ago, but haven’t completed it.
They have decided to delay taking Social Security until age 70. This is a great idea, especially because both of their mothers are still alive and they only recently lost their grandparents. In the two years after Ed retires, I suggest that they withdraw approximately $36,000 from the IRAs to live on. This would keep them in a lower tax bracket and reduce the amount they may have to pay once they are 70 and collecting Social Security and pensions and are required by law to draw on their IRAs.
Lastly, because the couple already has two great guaranteed lifetime streams of income — Diane’s city pension and their Social Security — the expense of purchasing an annuity is not as valuable to them as it may be to others. When Ed retires, they should roll over his 401k to an IRA, remembering to keep investment expenses in line and always diversify.
Congratulations to Ed and Diane — they’re livin’ the dream!
Pam Dumonceau has 21 years of experience in the financial planning industry. What’s the Plan is not a substitute for financial planning or dedicated professional advice.
What’s your plan?
Ask Pam what you should do about your finances. E-mail whatstheplan@consistentvalues.com to get advice in this Denver Post column. There’s no cost, and your names and identifying information will be changed to protect your identity.
