As Pam looks ahead to a life without Steve, her consuming worry is how much money she will need to earn to support herself. The dream of growing old with her husband is gone, and she has a long future of her own to pay for.
The couple are fortunate that they have considerable resources to work with. In addition to their retirement accounts, they have $108,000 left in their taxable accounts. Pam will also be the beneficiary of Steve's life insurance policies, totaling $375,000.
Since his departure from his company earlier this year, Steve has been getting buyout payments of about $37,000 a year, and those payments will continue after his death -- assuming the company is profitable. The Social Security disability benefits he's been collecting since his retirement in January, along with private disability payments, bring in an additional $7,800 a month, but that income will end with his death.
Pam has always depended on Steve to manage their finances. Even now she leans on him for advice, and he continues to oversee the household books. And Pam is struggling to make the math work.
As best as she can determine, she'd have to go to work right after Steve dies and make perhaps $100,000 a year, to avoid drawing down the retirement accounts soon afterward -- worrisome considering that's far more than she made before he became ill. And that anxiety about money is eating into the time she has left with Steve.
To help Pam and Steve sort through their options and separate fact from fears, Money turned to Priscilla Gilbert, a financial planner with J. Cole Financial Advisers in Philadelphia.
Gilbert examined various scenarios for the years ahead, working with Pam on her job and lifestyle expectations following Steve's death and over the long term. Here are the planner's recommendations:
Deal with the immediate challenges. Over the next several months Steve and Pam face high and rising expenses as his condition worsens.
In addition to his medical bills, the couple will need to hire extra home help, which isn't covered by Medicare. Combined with their current spending on other household items, Gilbert estimates that they'll need about $145,000 to get by.
With Steve's current life expectancy they can probably cover most of that from Steve's buyout and disability payments. The planner also urges them to review the titles on their nonretirement accounts to make sure they are held jointly or in Pam's name alone. That will help avoid probate and ensure she has access to that money.
Create a livable income stream. After Steve's death, Pam will no longer be contending with a $45,000 annual bill for medical and home health care costs. Gilbert suggests Pam look for other ways to save money -- for instance, aiming to pare food and household incidentals, which now run the couple nearly $1,500 a month, to $700.
Even with these cutbacks, however, Gilbert estimates that Pam faces expenses of about $100,000 a year, since she plans to keep living in the house. Yet her only income will be from Steve's buyout payments of $37,000 a year.
Where will the rest of the money she needs come from? Gilbert suggests that Pam ease back into the workforce starting in 2014, with a goal of making $25,000 in after-tax earnings that year and $55,000 in 2015 -- levels that Pam thinks are realistic.
After setting aside $40,000 for an emergency fund, Pam can then tap non retirement savings to make up the shortfall -- first bank accounts and mutual funds, and later relying on the proceeds of Steve's life insurance policies.
When the buyout payments end in 2019, Pam will be 60 and can replace part of that money by taking Social Security survivor benefits on Steve's earning record. That would bring in nearly $1,200 a month.
Keep retirement savings options open. Gilbert recommends keeping the retirement accounts in Steve's name for maximum flexibility. If for some reason the couple need to use the funds while Steve is alive, they'll be able to withdraw money without penalty since he is already over the required minimum age of 59½ (he turns 61 this month); Pam would then be able to withdraw from the accounts after his death without penalty, if needed.
Ideally, they'll be able to leave the retirement accounts alone so that they can continue to grow tax-free for as long as possible. (Tax rules require that once IRA withdrawals begin, they must continue.) If the accounts remain in Steve's name, Pam will not have to take distributions until 2022, the year Steve would have turned 70½.
As 2022 approaches, Pam can elect to roll the IRAs into her name if she doesn't need the cash right away. That will enable her to further defer withdrawals until she reaches 70½ in 2029.
Fix the investment mix. The retirement portfolios are currently invested mostly in midcap U.S. stocks, an asset mix that Gilbert feels is too aggressive for their circumstances. She suggests that they keep nearly half their assets in fixed-income investments (mostly investment-grade bonds), 35% in larger U.S. stocks and developed-nation foreign equities, and most of the rest in smaller domestic and emerging-market securities. They can follow the same asset allocation for the life insurance proceeds.
With her financial picture clarified, Pam says that she can focus on the time she has left with Steve. She is trying to remain upbeat about everything, including the demands of caring for a husband with ALS.
"When I met him, I wanted to get 30 years out of him," she says. "I may get only 10, but I have him 24/7, so that adds up to 30."
Stoic about what lies ahead, the couple occasionally take time for reflection. Years ago, when Pam was a reporter, she recalls, she would write obituaries noting that somebody "lost a battle" with cancer or another disease. "I know people who have battled, but I don't think we're battling. We accept death," she says. Steve chimes in softly, "When I die, the disease dies with me, so that's at least a draw."
|Steve's buyout payments||$37,400|
|Private disability||67, 512|
|Social Security disability||25,740|
|Withdrawals from savings||10,000|
|Steve's buyout payments||$37,400|
|Withdrawals from savings||38,000|
|AFTER FIVE YEARS|
|Social security survivor benefits||$19,350|
|Life insurance proceeds||35,000|
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