Get With The Plan: August 28, 2011

82811Joe, 76, and Cindy, 75, know they can’t take it with them.

The grandparents of seven want to know if they can help their family financially.

“We’re trying to see if it is feasible to help three remaining grandkids with college and maintain current expenses,” said Joe, who said he and his wife spend their time with family, volunteering and taking a trip once in a while.

The couple, whose names have been changed, have saved $162,500 in IRAs, $45,500 in mutual funds, $101,700 in bonds, $32,100 in a money market and $2,000 in checking.

Joe receives a pension of nearly $58,000 a year, and Cindy will be eligible for a 50 percent survivor benefit should Joe die first. The Star-Ledger asked Doug Buchan, a certified financial planner with Main Street Financial Solutions in Pennington, to help this couple balance their spending and gifting wants with their current budget.

“They have two primary goals. The first — what most couples are thinking about as they head into their golden years — is to ensure their money outlives them,” Buchan says. “The second is to continue to be able to contribute to college expenses for their youngest grandchildren.”

Specifically, they would like to gift $50,000 over the next four years.

Complicating matters is the fact that Joe has some significant health issues. His prognosis is uncertain, but he’s not expected to live much beyond five years.

Joe has a nice-size pension, Buchan says, but the survivor benefit is 50 percent, meaning Cindy will only receive half of the pension when Joe dies.

“The biggest risk from a financial perspective is if Joe passes within five years and Cindy goes on to the ripe old age of 100 or beyond,” Buchan says. “This is not an unrealistic scenario, and we have to plan accordingly.”

He says the couple are typical of those their age, in that they enjoy helping out and gifting to their grandchildren.

“It makes sense. It’s a nice feeling to be able to gift while living, and they enjoy seeing children and grandchildren enjoy the fruits of their hard work over the years,” Buchan says.

Given that, it’s sometimes difficult to pull the plug or scale back on such gifts. But, Buchan says, too much gift-giving may sabotage the couple’s primary goal.

Beyond the $50,000 for college costs, he says they should pare back their giving. Especially, Buchan says, if Joe dies within five years and Cindy lives well into her 90s, the couple will need to reduce their gift-giving and charitable contributions by half.

Currently, over 25 percent of their monthly budget goes to gifts and charity. If they knock that down to 12.5 percent of their overall budget and they invest properly, Buchan says they should have no problem “maintaining their current lifestyle and living out their lives with the dignity and independence they deserve.”

Buchan says the couple’s portfolio needs some adjustments. They currently have about 60 percent of their investable assets in cash and inflation-protected bonds. The 60 percent is solid, he says, but needs some tweaking.

He recommends $50,000 should be very liquid because it’s earmarked for upcoming college tuition bills.

“There’s not a significant advantage to a 529 (college savings plan)at this point as the time horizon is very short and the couple’s tax bracket is low,” he says.

He recommends the balance of the 60 percent be split between inflation-protected bonds, high-quality short-term bonds and cash.

It’s the remaining 40 percent that needs a major overhaul as it’s currently invested in one stock and a high-yield bond fund.

“Owning one stock — regardless of how much you love the company – is not an investment, it’s a gamble,” he says. “With your core investment capital, you must invest, not gamble.”

To invest you must be broadly diversified across all of the critical asset classes.

Buchan says if an investor wants to gamble, he or she should set aside some play money made up of no more than 10 percent of investable assets and watch “any of the gambling stock shows.”

Buchan says high-yield bonds are probably the one asset class he’ll never recommend.

“There are so many problems with that asset class as a long-term investment, among them being liquidity issues, high costs, callback risks, ” he said. “I just don’t see a place for these assets in a portfolio.”

Buchan says the best way to access the global markets in the cheapest and most tax efficient way is by owning the DFA Global Equity Fund to the extent you can. This is an adviser-sold fund so it may not be available to all investors. Instead, he says you can mix 60 to 70 percent in Vanguard Total Stock Market index and the other 30 to 40 percent in Vanguard Total International Stock Market, calling those funds an excellent choice.

When it comes time to take Required Minimum Distributions from the IRAs, Buchan says the couple should take the RMDs proportionately, making sure the end result keeps their investments in the appropriate allocation.

He also applauds the long-term care insurance policy the couple has for Cindy. While Joe doesn’t qualify for one, Cindy’s policy should make her future more comfortable should she need care.