Get With The Plan: March 2, 2014

3214Joelle, 71, retired in 2012. Her pension, Social Security and investments pay her bills, but she has complications with her real estate holdings.

There’s her primary home, which needs a $15,000 to $20,000 emergency home improvement.

Then there are two other properties, which Joelle thought would be rented by her two grown children.

One is working out fine, but the second is iffy, at best.

The adult child who rented it died unexpectedly, and the home is still lived in by that child’s longtime partner — we’ll call the partner Lynn — and some of Lynn’s friends and their pets, who were never invited by Joelle to live there.

“I would ideally like to sell, if I can,” Joelle says, noting that she has concerns about her liability.

She says she’d take the proceeds from the sale to pay off the mortgage on the other home, and also financially help Lynn, who would need to find a new place to live.

But the relationship between Joelle and Lynn is strained at best because Lynn believed Joelle would gift the property.

In addition to the three homes she owns, Joelle has saved $164,000 in a 401(k) plan, $41,000 in an annuity inside an IRA, $35,000 in savings and $1,000 in checking.

The Star-Ledger asked Douglas Duerr, a certified financial planner and certified public accountant with Duerr Financial Group in Montville, to help Joelle decide what to do with her assets.

Duerr took a look at the situation with the home.

“While Joelle does not want to kick them out, she is concerned about the liability issues associated with them living there,” Duerr said. “They currently do not pay enough to cover all of the expenses on the property.”

Plus, the home needs some work, which Joelle would have to pay for, and Joelle only has homeowner’s insurance on the property, with no additional liability coverage.

Duerr says the first thing Joelle should do is call her insurance agent to get proper coverage on this home, as well as on the home her other child lives in.

“She needs to ensure that should anyone get injured in any way that she is properly insured,” he says. “Since this is not her personal residence or even a vacation home, she does not currently have the appropriate insurance for it.”

Next, she needs to contact a lawyer in the state where the other home is so she can learn more about her rights and how she can proceed with selling the property, especially if Lynn doesn’t go quietly.

Joelle says she doesn’t believe Lynn would qualify for a mortgage, but she’d be willing to give Lynn half the proceeds from the sale of the home. But given that Lynn believed Joelle would gift the whole house, it’s an uncomfortable and touchy situation.

“The current situation is not good for her,” Duerr says. “Joelle needs the additional assets to help pay her other bills and may want to apply some of this money towards paying down a mortgage or for remediation cleanup required at her home.”

Taking a look at Joelle’s income and expenses, Duerr says she needs to pull $5,000 to $7,500 a year from her investments — on top of her pension and Social Security — to meet her current costs.

“This is not a huge amount of money to draw from her retirement accounts, however, it is approximately 5 percent a year,” he says. “While that is not a huge number, a safer withdrawal rate is more around 3.5 to 4 percent.”

At 71, Joelle is still young, and hopefully will have a long retirement ahead of her, Duerr says. That’s why it’s essential she make sure her assets last, he says, and that’s why selling the home is so important. It would decrease her expenses and give her additional assets to work with.

One problem with Joelle’s investments is that her asset allocation is out of whack. The bulk of Joelle’s 401(k) is in three investments, and 25 percent of the account is invested in her former employer’s stock.

Joelle says she’s comfortable with the current allocation because it returned 12 percent in 2013, but Duerr says the annual performance does not mean proper asset allocation, even in a good year.

Joelle needs to readdress the holdings and make sure they meet her long-term objectives, and she especially needs to reconsider having such a large stake in one company’s stock, he says.

“While it is a very good and established entity, things can happen at any point and the stock can decrease in value, so to have 25 percent of your account in one holding is extremely risky,” he says.

Duerr says it’s common for an employee to have loyalty to their former employer, but he says Joelle can’t afford to take a chance that this one stock won’t take a turn for the worse and lose a lot of value, possibly wiping out a large percentage of her savings.

Joelle was interested in long-term care insurance to help pay the bills should she need care someday, but she decided it was too expensive, Duerr says.

“I would suggest that she reconsider purchasing a policy while she is still young,” he says. “These policies can be expensive, but should you need care at some point in the future the actual cost of the care could cripple her financially.”

Duerr says Joelle shouldn’t wait before addressing the home situation.

“With some time addressing this, establishing a proper asset allocation, and cleaning up a few other items will certainly help her work toward achieving her overall goals and hopefully have a happy and long retirement,” he says.