RETIREMENT

  
Retirement:The Joneses do not appear emotionally or financially prepared for retirement. (Click here for their case study.) Given the loss of John’s job, and more importantly, the accident that claimed their son-in-law’s life and left their daughter disabled, surely this is not an opportune time to retire. Decisions made in such an emotional state might not be the best.

Let’s look at their finances. The Joneses earned a gross $290,000 in the last year. If they are like most couples, their living expenses would be estimated at close to 80% of their income. Thus, we have a couple accustomed to a $200,000 to $225,000 standard of living.

Their savings amount to just over $1.4 million. Assuming the proverbial 4% withdrawal rate going forward, their income would be a mere $58,000. Adding in the vacation home and boat sale, the income increases to an estimated $72,000 per year. This is well shy of their assumed normal living expenses, even if both took Social Security benefits early.

John should continue looking for work. Health care reform is going to have an impact on every business in America, and with his background in human resources, he would be extremely valuable to companies as a consultant, employee or contractor. At 63, John is employable and more than likely has several good years ahead of him.

Jenny should continue to work, as her income is critical to the family during this transition.

PRIMARY HOME

With so much on their plate right now, it might be best for John and Jenny to remain in their home. Purchasing a new home jointly with their daughter just does not seem logical or financially prudent. For one thing, a one-story home would have to have two master bedrooms, an oddity in the real estate market. Further, what about James, their son? Do they help him purchase a home as well?

John and Jenny obviously want to help their daughter, but they should do so by encouraging her independence. With part of her husband’s life insurance proceeds, Jenna should retrofit her home to make it more accommodating to her physical limitations. In addition, she should buy a retrofitted van that would enable her to drive.

If the Joneses want to downsize down the road, it would be in their best interests to purchase their new home outright without a mortgage encumbrance.

VACATION HOME

John and Jenny should explore whether John’s brother or sister, or both jointly, would entertain buying the vacation home and boat. This keeps the home and boat in the family and presumably would still allow the Joneses to take advantage of the family getaway.

A second option would be to rent the vacation home to provide some necessary income and help pay the $1,500 in monthly expenses. They must realize, however, that capital improvements will be necessary once they finally do sell the home —at a time when cash flow might not be sufficient.

The third option would be an outright sale. With mortgage rates at near-50-year lows, this might be a good option for a potential buyer. However, in this real estate market, downward pressure on the selling price might occur for a second- home property.

If they do sell the property, the proceeds should become John and Jenny’s two-year emergency fund to bridge the intervening years until Social Security and retirement kick in.

INVESTMENTS

Preparing this portfolio for retirement will take time. However, there are some things they can do right away.

Capital gains tax changes will be in play before the end of the year. It might be best to take some gains now at 15% instead of waiting until next year, when rates will rise. Dividend income will also be taxed at a higher rate in 2011.

I strongly recommend that John and Jenny follow a passive investing approach, specifically Dimensional Fund Advisors’ balanced-asset-allocation system. Depending on their Finametrica risk tolerance testing, it is likely this couple falls into the 60% stock and 40% fixed-income investment strategy.

One of the first things I would address would be the brokerage firm account, which is inadequately diversified and carries considerable risk associated with individual stock holdings. Further, the blue-chip stocks duplicate the S&P 500 index holdings. It is time to review the gains and losses in this portfolio for tax purposes and with an eye toward the ultimate investment strategy.

Subsequently, we could also make adjustments to the tax-deferred accounts. To make matters easier for John, I would suggest rolling over his 401(k) plan to his IRA.

I would not include annuities in their investment portfolio.

INSURANCE

By purchasing long-term-care insurance, John and Jenny have shown that they do not want to become a burden to their children. But a thorough review of their LTC policies is a must. For example, does the policy have an inflation rider? I also question the wisdom of having a policy with only a five-year benefit period. With a disabled daughter whose ability to care for her parents is limited, it might be best to extend the benefit period for their lifetime, especially for Jenny.

The question of life insurance coverage is not as critical at this stage in their lives. The Joneses already have ample life insurance for the next two years should one of them die.

ESTATE PLANNING

Assuming the Joneses have not reviewed their estate planning in awhile, this is a great time to do so, given the disruptions in their lives. The family situation has obviously changed. It is time for a heart-to-heart discussion with the Joneses. Do they intend to leave more of their estate to their daughter and grandson or treat their children equally?

A board-certified estate attorney could help them decide whether to create a trust. One possibility is a life insurance trust for the children, especially if estate tax laws revert to 2001.

It is critical that the Joneses have all estate-planning documents executed as soon as possible, including a durable power of attorney for health care documents. The objective is to make sure they are not a burden to their children in the future. Further, adding a directive to physicians and guardianship documents are necessary for end-of-life decisions. The will and testamentary trusts will allow for any tax-saving measures and answer how to divide the estate once both John and Jenny are deceased.