Plan 8: Dave’s Wife Died

Dave is 44 years old.  He has two kids, age 11 and 13.  He’s just received a substantial life insurance payment.  His wife died last month.

Dave's Wife Died

Plan 8: Dave’s Wife Died

Background

Dave’s wife died last month, leaving him a life insurance inheritance of $900,000 with two dependent children.

Spending

Before his wife became ill, they spent most of their combined $110k yearly income, while making small contributions to a company 401(k) plan and accumulating modest savings.  Dave does not yet know what a “typical month” of spending will be going forward.

Assets

  • ~$30k in 401(k) invested in target retirement date mutual funds
  • $900k from life insurance policy (currently in a savings account)
  • ~$60k/year from his income
  • ~$15k in checking/savings

Total Assets:  $945k + $60k/year

Liabilities

  • ~$20k medical debt (estimate, might be more or less)
  • $13k car loan (2.9% interest)
  • $235k mortgage (4% interest)
  • Unfunded College for Children

Dave’s Goal

Provide for his children until they are independent and provide for his own retirement at Age 65.

Dave’s Plan

First, before anything else:  There’s no rush.

Every one of these decisions can wait a year and the outcome won’t be significantly impacted.  It’s far more dangerous to hurry into a solution that hasn’t been well thought out than to calmly wait and execute a plan.

There’s no rush.

______________

When he’s ready to begin, I have good news:  Dave is done saving.  His path towards a prosperous future is different from many working folks, because he has more than enough in savings to assure a strong future retirement.

I suggest the following course of action:

Step 1:  Use the life insurance money to pay off his car loan, medical debt, and mortgage totaling $268k.  It’s true that there’s no rush, but paying off these debts is straightforward and not a move he’s likely to regret.  I think it’s fine to knock this step out right away.

Step 2: Invest the remaining inheritance ($632k) in a three fund portfolio.  Do not touch this money for any reason until Age 65.

Step 3: Live off of his income of $5k per month.

Projections

After completing the three steps of his plan above, the great looming question is if $632,000 invested today will be sufficient to meet his needs for a long retirement starting 20 years from now.  We’ll use the 4% rule with a goal of maintaining $5k/month spending in retirement to establish a target of $1.5 million saved for retirement by Age 65.

Assumptions

  • Three Fund Portfolio, with 33% allocated to Domestic/International/Bond.
  • Initial contribution of $632,000 with no further contributions
  • Annual Rebalancing to target allocation.
  • Target Balance = $1.5 million, adjusted for inflation.

Results

Dave is Done Saving
Dave’s Retirement Account Balance if he makes no contributions or withdrawals until Age 65

As you can see in the above figure, Dave is on a nice trajectory towards a comfortable retirement, even if he encounters some of the worst case scenarios the market has to offer.

Alternatives and Contingencies

I would add a few considerations to the above plan.  While Dave doesn’t need to make any more contributions towards his retirement, he should still take advantage of his 401(k) and Roth IRA each year.  This will significantly lower his tax burden, especially if there’s a 401(k) Roth option.  In practice, he could withdraw $5500 from his taxable investment account while at the same time contributing $5500 to a Roth IRA from his checking/savings account.  Effectively, he’s not touching his retirement money, but he is converting his regular paychecks into tax advantaged spaces.

Additionally, if Dave notices that his glide path is trending closer to the “worst case scenario” line, he’s not helpless – he should make small contributions to his retirement account until it has caught up to the expected value.  Alternatively, if he finds himself in the “best case scenario” portion of the graph, it may be an indicator to sink more funding into 529 education accounts for his children.

Finally, Dave may decide not to work until 65.   It’s apparent from the graph above that with very little extra effort, he could retire around Age 58.  He could make additional contributions to retire even sooner, or to have a larger nest egg and a more resilient retirement experience.

Conclusion – The Importance of Life Insurance

In Life and Death, I looked at a thousand couples, all starting at Age 30.  In 11 cases (1.1%), the wife died before Age 40 leaving a husband to outlive her by 20 to 50 years.  These data are based on the actuarial tables the social security administration uses, they aren’t made up.  And while it is unlikely that such a tragedy would happen to any one person, it is inevitable that it will happen to some.

Imagine the additional stress and pressure on Dave if his family had not been protected with life insurance.  I think it would turn an awful situation into something akin to catastrophe.

Here’s what you need to do:

1. Determine if you need life insurance.  If no one depends on your income, you don’t need it.

If you do need it: don’t delay.

I bought life insurance a few years ago when my first child was born and for something like $20/month I’m sure that my untimely passing won’t be a catastrophe.  I bought my insurance through the company Life Quotes, through a process that was simple and straightforward.  They provide access to comparative quotes for term life insurance that “cater to the needs of self-directed personal shoppers.”  You should buy term life insurance, not whole life.  This is a really easy and effective way to do it.

Life Quotes Portal

It’s quick and easy to get a cost comparison (click above), but expect to put a little effort in after that.  If you want the absolute best rates, you’ll likely have to follow through with a physical and some blood work.  I had a (very talkative) medical professional come to my house at a time I scheduled to complete this work.  Pretty easy, and proving I was as healthy as I had self reported saved me around 20% on my premiums.

2. Set up a Legacy Binder.  I’m still working on mine, but the Physician on Fire has a good overview for how and why you should do it.  I don’t think it’s an absolute imperative, but it’s another thing that grown ups do to organize and plan for the people they care about.

3. Have a will.  I made a free one at Rocket Lawyer.  It doesn’t have to be fancy, just get one in place and check in on it every year.  Having a will helps you to stay organized and it helps you engage in difficult conversations that can be a bit awkward.  But that’s better than not having a plan at all and leaving your loved ones in disarray.

Dave’s wife died at a young age, and that’s something no one should have to endure.  But because they prepared and had a plan to protect themselves, his and his children’s future are secure.

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