“We want to survive in retirement until our final days,” says Lou, 66. “We’d like to leave something for our five grown children and possibly set up college funds for seven grandchildren, ages 7 to 15.”
Lou and Susan, whose names have been changed, have set aside $1,025,000 in IRAs, $60,000 in an annuity, $28,000 in a brokerage account and $35,000 in a Money Market fund. They own their home mortgage-free and they have no other debt.
The Star-Ledger asked Nick Spagnoletti, a certified financial planner with MACRO Consulting Group in Parsippany, to help the couple plan their financial future.
“Thankfully, much of their retirement income needs are being met by Social Security and Lou’s pension,” Spagnoletti says. “They do have some interesting twists that could pose threats.”
The first issue to tackle is that Lou’s pension will pay during his lifetime only. If he dies, Susan won’t receive any additional funds from his pension. Spagnoletti says Lou does have life insurance in the amount of $330,000, which will help make up for the income loss, but there would still be some shortfalls in income for Susan in her mid 80s in a scenario where Lou passes early. Most of Lous’s insurance is term, and the premiums will jump dramatically at age 76.
“He has some health history, but is probably still insurable,” Spagnoletti says. “He may wish to pursue either converting his current term to permanent insurance, with no need for a medical exam, and maybe adding some additional coverage.”
The couple’s portfolio needs a closer look. Most of their assets are in two separately managed accounts — a fixed-income portfolio and a large-cap value portfolio. Both have had mixed performance the past few years, Spagnoletti says.
Additionally, they are paying more than 1 percent in management fees to their adviser, plus the internal expenses the manager is charging.
“The performance has been mediocre and they may want to ask their adviser what due diligence went into the selection of the managers,” Spagnoletti says.
Another problem is the portfolio is overweighted in large-cap domestic stocks, which hasn’t been the greatest-performing asset class in the past 10 years. Spagnoletti says they lack international, small- and mid-cap domestic exposure.
Lou and Susan say they’re nervous about venturing into those more aggressive asset classes, so Spagnoletti recommends they consider index CDs as an option.
“These are FDIC insured CDs that instead of paying a fixed interest rate, provide the investor exposure to an index, possibly an equity index or basket of stocks,” he says. “If the index goes up, the investor receives a portion of the positive return, but if the index falls, they get their original investment back.”
Spagnoletti says he recently put some clients into a five-year CD that was linked to the S&P 500. Those investors will receive back whatever the index does over five years, capped at 55 percent, or their original investment, whichever is greater.
“It’s a way for them to gain exposure to international stocks with no risk to principal; a way for them to dip a toe in the water of asset classes they have missed out on,” he says.
Another concern the couple should address is their heirs. One of their five adult children is a son with special needs, and today, their estate plan includes a double inheritance share to one of the siblings, who would then in turn take care of the special-needs son.
“The problem with this is in the event of bankruptcy, legal action or divorce, those assets intended for the son could be in jeopardy,” Spagnoletti says.
Instead, they should talk to an estate planning attorney about a special-needs trust. The son’s eventual inheritance would be paid to the trust and not disqualify him from any government benefits.
While they’re at it, Spagnoletti says they should check the beneficiary designations on their IRAs because those assets will be passed based on the beneficiary designation and not the will.