Planning for the unexpected
By Peter “Coach Pete” D’Arruda
Capital Financial Advisory Group, LLC
“To expect the unexpected shows a thoroughly modern intellect.” – Oscar Wilde
I have what my wife, Kim, calls an unreasonable disdain for toll roads. It used to be that when I traveled in the northeastern United States, I would carry about $30 worth of change with me. The quarters, dimes and nickels sat in a soft leather pouch on the console between the passenger seat and the driver’s seat. When we rolled into the toll area, I either had my change ready to fling at the basket, or bills in hand to pay the person in the toll booth. Nowadays, I try to avoid the rat’s nest of pay highways in that part of the country by setting my GPS to find alternate routes. I have always viewed toll booths as a money-grubbing nuisance. If I had my way, I would eliminate the entire lot of them.
I have given some thought to this little hang up of mine, and I have come to the conclusion that there are two reasons why I have it. One has to do with the principles of thrift instilled in me by my parents. Paying to drive is like paying to breathe.
The other reason has to do with an experience my father and I had with a toll basket in New Jersey when I was around nine years old. Our drive that day took us through one tollbooth after another. In time, the manned stations gave way to the newer, automated stations — the ones with baskets that would catch the coins you threw into them. Whenever my father saw the sign that read, “Pay Toll Ahead”, he began digging through his pockets for change. At one particular toll booth, however, he searched into every pocket without results. The toll roads had (pardon the pun) taken their toll. Dad was completely out of money.
“Do you have any change in your pocket, Peter?” he asked hopefully.
I shook my head, wishing I could help.
The lanes widened as we approached the toll baskets. Dad selected an empty chute and pulled in. We were supposed to stop on red, give the machine its due, and then take off when the light turned green. My father stopped the car, shrugged his shoulders and just drove through the red light. What else was there to do? He couldn’t throw anything at the basket, because there just wasn’t anything to throw.
The New Jersey state trooper pulled us over about a mile down the highway.
“It must have missed the basket,” my father said, as the officer nonchalantly continued writing out the ticket.
Avoiding life’s toll booths
On life’s highway, there can be many unpleasant interruptions and roadblocks that can impede our journey and serve as sources of irritation. We can avoid many of them by planning ahead. Personal global positioning systems were something out of “Buck Rogers” when my father and I had our little run-in with the New Jersey State Police. Today, a small 4" by 5" box could have steered us around that situation. Other such encounters can be dealt with by simply preparing for them, just as our troubles could have been avoided by taking along enough money for the tolls. Divorce
There are some life events we don’t prepare for because we can’t envision them ever happening to us. No couple thinks of divorce during the ceremony, or when the music is playing afterward. It’s the furthest thing from the minds of the happy couple. But almost half of all American couples who marry end up getting divorced. So, it’s a fact of life.
In April 2012, the National Center for Family & Marriage Research released a study on the “Gray Divorce Revolution” that said divorce rates are higher for members of the baby boomer generation than for any previous generation, and that an unprecedented number of Americans are splitting up after turning 50. The study revealed that 1 in 4 divorces involves adults over 50, whereas in 1990, the statistics were 1 in 10. That’s quite a jump.
Longevity plays a factor. Sixty is the new 40, an age where many boomers feel like life is just beginning for them. A relationship that has lasted under stress for 20 or 30 years might just not have the staying power it once did when you were “over the hill” at age 50.
The financial fallout from divorce in later years is considerable. Let’s face it, the longer the couple has been together, the more assets they possess and the more complicated things become when there has to be a division of those assets with retirement right around the corner.
The reason why I bring this up here is not to pass judgment or cause trouble. I mention it simply to point out one potential “toll booth” that might impede your clients on your road to retirement and to help you know how to deal with it. Divorce may feel like the right thing to do emotionally, but I would be remiss as a financial counselor if I didn’t encourage anyone contemplating divorce to count the cost. In these uncertain economic times, happy endings are not always the end of the story. Consider these things:
- In unsettled economic times, older single people face more economic hardships than do married couples.
- If the divorce happens during a time when property values are down (buyer’s market), a forced sale of jointly owned property may cost each participant in the divorce thousands of dollars.
- Retirement accounts, 401(k)s, 403(b)s, TSPs and any other retirement account gets split between the couple.
I have seen cases where one spouse views this as a nice little consolation prize for having put up with “that jerk” for 20 years, and proceeds to blow the proceeds on a shopping spree. Spending the money may make them feel good temporarily, but at the end of the year, when they get a nice little letter from Uncle Sam reminding them that they now owe taxes on the entire amount, the good feeling is gone. Had they seen a financial professional beforehand, they would have likely learned that any money received from a qualified account, such as a 401(k) or 403(b), should be rolled over into another qualified account or transferred into a self-directed IRA. Another mistake happens when, in order to pay the tax bill, the divorced mate digs the hole deeper by dipping into his or her retirement savings again to pay the unexpected tax bill. That is called a “double whammy,” because there will be yet another tax bill for the additional funds used to pay taxes.
Let’s say that you were the responsible mate — the one who did everything you were supposed to do. You made sure to contribute the maximum from your paycheck into your retirement plan. Your spouse, on the other hand, saved nary a penny and selfishly blew whatever money he or she had. Now, divorce happens.
Your $400,000 401(k) is now worth $200,000. You now have half the money you thought would be available for retirement. Unfortunately, at this point, some will try to play catch-up and put more of their assets at risk than they should.
Instead, a retirement income specialist should step in. Remember the rule of 100; put a percent sign after your age and this is the percentage of your assets that should be kept absolutely safe. In fact, because of these unique circumstances, you should add 10 percent to it. In other words, if you are age 50, then you should have 60 percent of your assets protected from market loss. There are still places out there where your money will grow and still be insulated from the volatility of the fickle stock market.
If your client was accustomed to letting their spouse make all the money decisions, then they probably need a financial plan that doesn’t require them to always have their hand on the wheel. They will probably be best served by a financial plan that can be placed on automatic pilot.
“He handles the money”
In many marriages it is not uncommon for one spouse to handle all the financial affairs, while the other spouse has little knowledge of such things as investment accounts, retirement strategies, budgets and the like. It’s not that the one spouse necessarily wishes to keep the other one in the dark — in some relationships, things just happen that way. I know of many marriages where the kitchen is the domain of one and not the other. Sometimes, one mate has a passion for the garden and the lawn, and the other mate isn’t at all interested in such things. Caring for the money in the family sometimes becomes a household duty of one and not the other by default.
“He makes the money, and I spend it,” laughed one woman. Referring to the couple’s finances, she said, “I don’t even need to know where the checkbook is; I use credit cards.” She wasn’t kidding, either. She really didn’t know where the checkbook was. If something were to have happened to her husband, she would have been hard pressed to find the documents necessary to carry on an independent life. I know of other cases where the roles are just the opposite. It’s the wife who pays attention to all things financial and the husband is the one who is in the dark.
In households where this is the case, I recommend that the spouse who handles the finances keep a simple notebook and leave it in a place where the other spouse can easily locate it at any time. The notebook should contain a list of financial institutions where money is deposited or invested, and the phone numbers of those institutions. It might also contain passwords to computer programs that are used to manage those accounts or view balances. If sensitive information such as passwords is kept in the notebook, it is advisable to keep the notebook in a safe. You can usually buy a small, fireproof safe for around $100. Oh, yes! I almost forgot. Make the combination to the safe something that he or she absolutely cannot forget, like the date of marriage, or a variation on that theme. That way, it is not only romantic, but practical.
When that spouse dies
It is easy to see why the death of a spouse who handles the money in the family can be financially traumatic. Emotions are involved. The person quarterbacking the retirement plan is gone. Perhaps the survivor’s relationship with the financial planner was non-existent or was less than favorable. Either way, the survivor feels alone. Hopefully, trusted family members can be of help at a time like this. But it seems that nothing stirs up trouble among family members more than jealousy over money. No matter what, this can be a difficult time.
This can be a time when sharks appear. It is a time to exercise caution if you are a bereaved spouse who now has to cope with financial matters with which you are unfamiliar. Sure, it’s a time when you need friends, but when “friends” begin taking an undue interest in your financial affairs, it should raise a red flag. It could be argued that someone who pries too deeply into personal matters during the grieving process is hurting more than helping.
When seeking the help of a professional, make sure that he or she is a fiduciary. Being a fiduciary means the person is bound by both law and ethics to act for another person’s benefit and not his own. Fiduciary responsibility is a very serious obligation in the eyes of the justice system. Fiduciaries must act on the clients’ behalf, putting the clients’ needs and interests ahead of their own. If they don’t, they could face legal trouble for their actions.
One of the most important questions to ask of a financial planner is, “Are you a fiduciary?” Ask if the individual is licensed with the state as a fiduciary. Don’t accept a verbal answer; ask for proof in writing that this is the case. No one wants to appear distrustful, but asking this question of a bona fide financial professional will not be taken as an insult. Asking to see credentials is perfectly acceptable when large sums of money are involved.
Some financial professionals may be perfectly legitimate in their field of expertise, but may specialize only in selling and buying shares of stock. They may not be acquainted with income strategies, wills, trusts and tax planning. If that is the case, then knowing that right away will prevent misunderstandings.
Trust, but verify
When a spouse dies and money decisions need to be made, trust is a huge factor. Those who are acquainted with the customs of the South know that in antebellum days, to question someone’s truthfulness was tantamount to questioning their honor and was an automatic invitation to a duel. Regardless of where you live, it is only human nature to want to display a trusting spirit. But nothing draws out the worst in people like the smell of money. It is prudent to establish verifiable trust before making any serious decisions about money after a spouse dies.
I am fond of something Ronald Reagan said when dealing with the Soviets on arms negotiation back in the 1980s. He was a master at using few words to make a point. Knowing that it was part of the Russian culture to speak with many proverbs, he borrowed a saying from Soviet revolutionary Vladimir Lenin and used it frequently, speaking in Russian, when discussing the language of a treaty being hammered out by the two nations. The proverb was, “"doveryai, no proveryai," the English translation of which is “Trust, but verify.” The expression was picked up by the media and became a signature phrase of the negotiations. It is a wise proverb and a prudent course to take whenever money is involved, especially at times when emotions run high. American/Irish humorist Peter Finley Dunne perhaps said it best, “Trust everybody, but cut the cards.”
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