Get With The Plan: December 30, 2012

GWTP-123012-01Jessica, 74, is a recent widow who wants to do what she can for her family. As a grandmother to nine, she wants to continue to help with college costs — while giving herself enough funds to enjoy her lifestyle and to travel when she wants.

“I need help determining how best to ensure my current lifestyle and provide assistance to my children for the grandchildren’s college expenses,” Jessica says.

Jessica, whose name has been changed, has $126,000 in IRAs, $387,700 in annuities, $153,800 in a brokerage account, $90,800 in mutual funds and $8,000 in checking. She also holds a mortgage worth $301,400 in one of her children’s homes, which should be paid off in 12 years.

The Star-Ledger asked Brent Beene, a certified financial planner with RegentAtlantic Capital in Morristown, to help Jessica manage her money so she can accomplish all her goals.

“In the past, Jessica and her spouse have shown tremendous generosity by gifting significant assets to the children,” Beene says. “A few years ago, they began gifting $10,000 towards each of the grandkids’ annual college tuition bills.”

Jessica has also considered selling her home and downsizing to a rental property or purchasing a condo.

“Ultimately, because all of the grandchildren will be attending college within the next five years, her financial independence will be a balance between how much she can gift to the kids and what type of rental property she can afford,” Beene says.

Jessica wants to maintain a $53,000 after-tax living expense and test flexibility on additional travel, while still gifting $10,000 annually to each of the grandchildren’s college tuition bills.

Beene modeled Jessica’s plan through age 93 and assumed that her only goals were to maintain her current lifestyle and gift $10,000 to each of the grandkids’ annual college tuition bills.

By diversifying her portfolio to a 40 percent equity and 60 percent bond split, Beene found she has an 81 percent probability of success.

Downsizing would help.

“Like most individuals in New Jersey, the cost of maintenance on the home and sizeable property taxes eat up a large sum of her annual living expenses,” he says. “By looking for a more manageable property in, ideally, a lower cost of living area, Jessica’s lifestyle and flexibility to pursue travel may increase as more of her budget would go toward her retirement wants and retirement wishes as opposed to taxes and upkeep.”

If Jessica decides to move, she should factor in the community she’s relocating to, access to essentials and the ease of transportation.

At the same time, Jessica would have to maintain discipline to reinvest whatever is remaining after the purchase of a new home and to avoid splurging on spending. Having these conversations will go a long way in helping achieve success in her financial plan, he says.

For those who aren’t debt or risk averse, Beene says today’s low mortgage rates provide an opportunity to invest assets that would normally go into the purchase of the home. The reasoning is that the growth on the assets used to purchase a home outright may appreciate higher than the cost of paying interest on a mortgage.

What if she were to rent?

Jessica expects her home would yield $500,000 after expenses.

The kind of unit she’s considering can go for up to $3,900 a month. That may be too pricey, Beene says

“As some find the hassles of homeownership too much to bear and the financial burden too heavy, it is important that Jessica keep her rental expenses reasonable, as the analysis shows her plan having the ability to maintain a rental expense of $2,200 a month, assuming she reinvests the $500,000 to her portfolio,” he says. “To live in a nice rental property, Jessica would need to reduce her living expenses.”

Beene says instead of outright gifting every year to the children, Jessica should consider gifting through a 529 plan.

“529 plans allow the tax-free growth and distribution of assets for qualified education expenses,” he says.

Although conventional wisdom says to invest in your home state’s 529 plan, Beene says you can invest anywhere. He looks at 529 plans with low fees, broad diversification and age-based investment options that invest the portfolio more conservatively as the child reaches college.

Beene also took a look at Jessica’s annuity and what options she may have. It no longer has a surrender period, which means she can she can freely transfer her assets to another annuity contract without any penalties.

There are several considerations that go into exchanging, surrendering, annuitizing or staying the course with the contract, he says. But before she decides to annuitize, or take monthly payments from the current annuity, she may want to shop around to make sure she gets the best deal.

In Jessica’s situation, the sizeable gain imbedded within her current annuity contract means that the majority of her payout is susceptible to ordinary income taxes. Whether she changes annuities or not, Beene says given today’s low interest rate environment, she may not want to annuitize yet. She may get a bigger bang for her buck if she waits.

“Because she has other assets to draw on, for now, it makes sense to either stay the course, if the annuity continues to pay a competitive rate, or seek a fee conscious annuity that can provide her with broad diversification,” he says.