Get With The Plan: August 4, 2013

8413Raymond, 70, and Angela, 68, say retirement is a reality for them.

Raymond’s pension and their Social Security payments have paid the bills. Now, they’re looking to what else their money — their legacy — can accomplish.

“Our biggest financial concern is the adequacy of our accumulated assets to assist in the educational expenses of our eight grandchildren, whose ages range from sweet 16 to 14 months,” Raymond says.

The couple, whose names have been changed, have saved $487,500 in 401(k) plans, $231,700 in IRAs, $35,200 in a brokerage account, $500 in savings and $500 in checking.

The Star-Ledger asked Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Fairfield, to help the couple come up with a plan for their golden years, and for their heirs.

After reviewing the couple’s portfolio, Lynch says the first issue he noticed was their stock allocation. Raymond describes himself as a conservative to moderate investor, which is generally 40 to 60 percent stock. But the couple’s allocation is aggressive — very aggressive — 100 percent stock.

“This means that they can lose up to 43 percent of their money, which they did back in 2008,” Lynch says.

Raymond and Angela are fortunate enough that they don’t need this money because of the pension and Social Security benefits, but the last big market downturn really upset Raymond, Lynch says.

“My point would be, ‘Why are you continuing to invest like that?’ There is absolutely no upside for you because they will not spend any more, and the downside is painful,” he says. “Only take a risk if there is a benefit to you.”

The majority of their money is in two mutual funds in a 401(k) plan that’s still with Raymond’s former employer. Lynch says the funds are good ones, but they can still tank.

“When I look at a good investment portfolio, generally it has what I refer to as non-correlating assets, which basically means that things work differently. If everything goes up together, they — guess what — they all go down together. Diversify!” he says.

Raymond also had some confusion about the IRA funds. He thought that he had an annuity contract for one of the IRAs, but he says he bought the annuity so his IRA could continue to have “tax-deferred growth.”

Lynch says if investors buy an annuity with IRA money, they should never do it for tax-deferred growth because every IRA or rollover IRA already has tax-deferred growth. If you buy an annuity, he says you should do it for the riders, which give you additional benefits such as a guaranteed withdrawal benefit or a guaranteed minimum income benefit.

Upon further review, Lynch determined this wasn’t an annuity at all, but a fee-based advisory platform with an investment advisory firm.

“First of all, my concern is that he was not aware of the type of product that he is in,” Lynch says. “Secondly, he had no idea of the fees that he is paying. If you do not know what you are paying, how do you know if you are getting a good deal?”

Lynch says this particular contract has fees of 1.25 percent annually, or around $2,700 a year.

“Always ask how your adviser gets paid. If they try to avoid the issue, ask again,” Lynch says. “No good adviser has any problem explaining their fee structure.”

The couple’s intention is to give their grandkids money, mainly for college. That’s why they’ve wanted to invest aggressively — so when they pass, there will be more money to leave the kids.

“The problem is that they are taking all the risk,” Lynch says. “I would much rather see them substantially reduce the risk — stock allocation — in the portfolio, and use the income to pay an insurance contract where they assume all the risk,” he says. “This means that if the market crashes again, they will be less impacted and less ticked off, and they generally can provide for a better benefit.”

Lynch says there are all different types of insurance contracts, but because the purpose is to have more money after everyone dies, he’d suggest looking at a “second to die” life insurance contract. It would pay a death benefit after the second person dies and is generally used for estate planning.

Lynch ran an illustration using a $1 million benefit for an example. The cost would be about $32,000 a year for a policy from an A++ rated company. Raymond and Angela would immediately have a larger benefit for their heirs, and the cost could be paid for by the returns of their investments. If they needed funds sooner, they could borrow from the policy’s cash value. If not, the death benefit would be worth around $1.2 million in 20 years.

Overall, it shifts the risk of growing an asset from Raymond and Angela to an insurance company.

The couple once every five years pays for a big family vacation for the entire family for about $30,000. Lynch thinks that’s great.

“They have the means to do it without breaking the bank. They live on the pension and Social Security benefits and their investments are gravy,” he says. “It gets everyone together and will give everyone great memories that will last for a lifetime.

“When you are on your deathbed, do you want to be thinking about money that will go to your kids when you die, or the great times that you had with your family when you were alive? If you got the money, spend it and enjoy yourself,” he said.