When her husband died, “Abigail” was consoled by friends and family. Her adult sons also flew in from out of town, and, after helping with the funeral and other personal matters, they turned their attention to their mom’s finances. What should she do with their dad’s investments, retirement accounts, and life insurance proceeds? How would she make up for a reduced Social Security benefit? What about the mortgage?
Good Intentions: After consulting with each other, the sons told their mother to: 1. Liquidate their dad’s $100,000 IRA and use the proceeds to pay off the $100,000 mortgage; and 2. Take a lifetime income payout from their dad’s $150,000 life insurance policy. Before leaving town, the sons helped complete the paperwork to finalize their mom’s new “financial plan.”
Unforeseen Problems: Luckily, Abigail decided to double-check things with her Certified Financial Planner™ practitioner. He explained that:
1. liquidating the $100,000 IRA would cause all of it to be treated as income, resulting in an extra $20,000 in taxes; and 2. taking the payout on the life insurance would give her income, but she would be without an emergency fund. She also wouldn’t have the cash to pay that $20,000 tax bill.
Professional Guidance: Yes, as you suspected, I was the planner Abigail consulted. Once she understood the calamity that was about to befall her finances, she asked me to quickly put a halt to the arrangements made by her sons. After talking through her situation and needs, I gave Abigail a better plan: 1. Pay off her mortgage with $100,000 from the $150,000 life insurance policy (instead of using the IRA – why? – life insurance proceeds are tax-free); 2. Keep the remaining $50,000 from the policy as a cash reserve; and 3. Make her husband’s $100,000 IRA her own (this would be a tax-free rollover), and re-invest it into no-load mutual funds (for growth and flexibility) and a fixed annuity (for steady monthly income).
Recap: Cash in the bank for emergencies, investments for growth, an annuity for income, no mortgage and no $20,000 tax bill . . . I’d say that’s a good plan. Abigail later admitted that she would have contacted me first, but she didn’t want to hurt her sons’ feelings and she thought “they knew what they were doing.” Here’s an idea: if you have family (or even friends) who want to help you with your finances, ask them to join you for meetings with a professional adviser. That is, unless you are one of those lucky souls who already has a son or daughter who is a Certified Financial Planner™ practitioner!
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