Simple Investment Strategy for Non-Savvy Surviving Spouse

[Lusitan]

If your spouse was not knowledgable about investing and you were going to give him/her advice about how to invest the proceeds of your life insurance, and you wanted/needed some very basic advice, what would you say?

My wife is hands-off when it comes to investing, so I've already advised her about moving all retirement savings to an appropriate Target Retirement Fund (in her case, 2040) if I died and wasn't around to manage the asset allocation anymore. The plan is that the retirement accounts would kick in around 2040 and last her through retirement.

As for the pre-retirement income (i.e. life insurance and other short/mid term savings) I may at some point decide to create a trust to handle the investment aspect of things, and of course she could always consult a financial advisor, but for now, assuming she'll need to invest the life insurance money on her own, what would be your simple back-of-the-envelope suggestion as to where that money should be invested? The key is keep it simple -- even if it's not ideal, there's a a better chance that simple advice will be followed and worse mistakes (hopefully) avoided.

Again, starting in 2040 (when she's 60) our retirement accounts will be accessible (and even at their current balances should be sufficient to last through the end of traditional retirement). They question here is how to make the life insurance and other assets last until 2040.

Ideally, the advice is a "set it and forget it" thing, where she can make one investment decision up front and then take a very hands-off approach.

My current thinking is to advise as follows:

To provide income until 2040, if I were to die between ...

... 2009 - 2020 = Vanguard Target Retirement 2010 (52/48 stock/fixed)
... 2020 - 2030 = Vanguard Target Retirement Income (30/70 stock/fixed)
... 2030 - 2035 = Vanguard LifeStrategy Income (25/75 stock/fixed)​

... 2035 - 2040 = Vanguard Inflation-Protected Securities (100% fixed)


Please poke some holes in this advice. What would you do differently? Am I thinking about this all wrong and is there another simple strategy I could advise? Or do you think the general concept is OK but there should be some tweaks I should make to the fund recommendations?

I know that there's no substitute for having someone actively managing the assets and making sure that the money is appropriately invested at all times, but if you had to give this sort of advice as a worst-case-she-has-to-invest-it-on-her-own-and-probably-will-never-become-investor-savvy thing, what would you suggest to your spouse?

 

[ziggy29]

I've left written instructions with my wife in my "If I Get Hit By A Bus Tomorrow" document to put all of our retirement funds into Target 2030 lifecycle funds. It's not optimal in terms of allocation or fees, but for a 41-year-old who currently knows little to nothing about money and investing, it's a decent choice for one-stop diversification that shifts to a more conservative AA over time.

And I also mentioned it would be a good idea to not make any moves for a couple of years at least, but to become familiar with investing basics.

 

[Leonidas]

...but if you had to give this sort of advice as a worst-case-she-has-to-invest-it-on-her-own-and-probably-will-never-become-investor-savvy thing, what would you suggest to your spouse?

Others will give you advice, I'll just empathize. The Princess is a natural born LBYMer, but for twenty years she didn't want to have anything to do with finances beyond basic budgeting and keeping the checkbook balanced. She wanted me to tell her what to do with the money if I croaked, but I insisted she learn the basics of personal finance and investing. She finally got interested a few months ago and we've been working our way through the list of stuff she needs to know. It's been nice and a huge relief for me. Having an active partner on this stuff is infinitely better than doing it alone.

I sincerely wish you luck with this.

 

[freebird5825]

From the perspective of a real life widow, allow me throw a few pointers out there...for BOTH genders.

I applaud you for doing this planning for your wife. It is a grim mental exercise that most people avoid, because facing one's own mortality is not so easy. LH and I did this exercise 2 1/2 years before I needed to enact the plan. We used a fee only CFP, soup-to-nuts analysis and plan. The $1500 spent in 2002 was a drop in the bucket versus legal costs that could have been incurred after the fact.

Money management savvy is not optional. A detailed understanding of the plan is key. There are way too many sharks in them waters...and they will come a'sniffing. I was already very savvy so I punched them on their snout (not literally ) and they swam away to find easier prey.

There is a really great book called The Widow's Handbook, which is a reference style guide for the recently bereaved. ISBN: 978-1-55591-014-3
Consider getting a copy for both of you to read now. It is very useful for widowers too, just mentally exchange the gender. It was my Bible.

I hope it's a very long time until anyone here has to put the plan in action.

 

[Moemg]

From another real life widow I would suggest writing everything and I mean everything down . I was financial savvy when my husband died but the shock of it made my mind go blank . Luckily he had written instructions for everything including who to contact about his pension , where everything was located and what he wanted me to do with his train collection . I've seem widows taken advantage of but I've seen other widows rise to the occasion when the have to take care of themselves . It's easy to let someone else do it until that person disappears . I'd offer a few ultra simple books to help the not knowing spouse . By the way if I had died my husband would have had to figure out how to use those big white things in the kitchen and laundry room plus how to use that thing I push around that sucks up the dirt .

 

[Rich_by_the_Bay]

At or near retirement? Not gonna go too far wrong with Wellesley and/or Wellington if income is a priority. Or a managed payout fund. Then keep maybe 2 or 3 years of expenses aside to deal with bear markets, etc.

Simple, probably a steady income stream, no muss no fuss.

 

[FANOFJESUS]

If your spouse was not knowledgable about investing and you were going to give him/her advice about how to invest the proceeds of your life insurance, and you wanted/needed some very basic advice, what would you say?

My wife is hands-off when it comes to investing, so I've already advised her about moving all retirement savings to an appropriate Target Retirement Fund (in her case, 2040) if I died and wasn't around to manage the asset allocation anymore. The plan is that the retirement accounts would kick in around 2040 and last her through retirement.

As for the pre-retirement income (i.e. life insurance and other short/mid term savings) I may at some point decide to create a trust to handle the investment aspect of things, and of course she could always consult a financial advisor, but for now, assuming she'll need to invest the life insurance money on her own, what would be your simple back-of-the-envelope suggestion as to where that money should be invested? The key is keep it simple -- even if it's not ideal, there's a a better chance that simple advice will be followed and worse mistakes (hopefully) avoided.

Again, starting in 2040 (when she's 60) our retirement accounts will be accessible (and even at their current balances should be sufficient to last through the end of traditional retirement). They question here is how to make the life insurance and other assets last until 2040.

Ideally, the advice is a "set it and forget it" thing, where she can make one investment decision up front and then take a very hands-off approach.

My current thinking is to advise as follows:

To provide income until 2040, if I were to die between ...

... 2009 - 2020 = Vanguard Target Retirement 2010 (52/48 stock/fixed)
... 2020 - 2030 = Vanguard Target Retirement Income (30/70 stock/fixed)
... 2030 - 2035 = Vanguard LifeStrategy Income (25/75 stock/fixed)​

... 2035 - 2040 = Vanguard Inflation-Protected Securities (100% fixed)


Please poke some holes in this advice. What would you do differently? Am I thinking about this all wrong and is there another simple strategy I could advise? Or do you think the general concept is OK but there should be some tweaks I should make to the fund recommendations?

I know that there's no substitute for having someone actively managing the assets and making sure that the money is appropriately invested at all times, but if you had to give this sort of advice as a worst-case-she-has-to-invest-it-on-her-own-and-probably-will-never-become-investor-savvy thing, what would you suggest to your spouse?

Your thinking looks good to me. You are close to age in bonds and that is the biggest point to follow.

 

[Dennis]

all very good ideas.. And It really All Depends on How much $ there is vs Needs.. If the SS or His Pension is cut down to a Multitude of things ..
Assuming one Does have Enough ? I aggree with just put it either in a VWINX or the appropiate TF.. I prefer the former vs the TF's..and have added HSTRX to my list now..

I had my wife pretty much Upto Speed, but she Died..but I have arrangements in place of what to do, When I can't manage things anymore..be it from a stroke, heart Attack or Playing Golf & Fishing with my HS Buddies who bought it during V.Nam Yrs..

 

[Lusitan]

Thanks for the replies, everyone.

Ziggy29 - yeah my instructions for retirement assets are pretty much the same as yours. I've advised my wife to transfer all of our retirement savings into a Target Retirement 2040 fund so that she doesn't have to stay on top of rebalancing or asset allocation, and the money should be properly allocated for her to start making withdrawals at standard retirement age. But as for the pre-retirement savings, that's where I've been trying to come up with a simple piece of advice for where to invest it; a little more complicated it seems.

Leonidas - yeah, sounds like we're in the same boat. She's good with saving money on day to day expenses, just hasn't gotten into the investing stuff (yet). I do plan to try to work with her to get her up to speed, but in the event that doesn't work out (or that I get hit by a bus before I manage to bring her up to speed!) I'm trying to come up with some basic advice.

Freebird and Moemg - interesting to hear your perspective as widows (sorry you had to experience that, but thanks for sharing). I am indeed writing everything down, in fact I've made some nifty little charts and diagrams showing our accounts and how things will transfer via beneficiary designations and/or will. It's a great idea to pick out some books now that she could read to learn more about finances -- I'll definitely check out The Windows Handbook. I'm not sure she would read it now (just being honest) because she's pretty busy with the little kid these days, but it will be good to have it there for her if/when she needs it.

Rich - we're nowhere near standard "retirement" age yet. Our retirement savings will to to Target 2040, but this was really about where the life insurance proceeds and other mid-term savings could go to provide income to last from the point of my death up until standard retirement (when she'd tap the retirement accounts). But I hadn't really looked at Wellesley/Wellington (sorry Uncle Mick!) so thanks for the suggestion, I'll take a closer look at them.

Dennis - sounds like another vote for Wellesley ... I'll check it out.

 

[freebird5825]

Thanks for the replies, everyone.
...Freebird and Moemg - interesting to hear your perspective as widows (sorry you had to experience that, but thanks for sharing). I am indeed writing everything down, in fact I've made some nifty little charts and diagrams showing our accounts and how things will transfer via beneficiary designations and/or will. It's a great idea to pick out some books now that she could read to learn more about finances -- I'll definitely check out The Windows Handbook. I'm not sure she would read it now (just being honest) because she's pretty busy with the little kid these days, but it will be good to have it there for her if/when she needs it.

YW and TY for the sentiments.
Re the book, chapters 5-11 are a great guideline for planning for anyone in life before any sort of calamity strikes. Even if a spouse is disabled, these are things we all need to think about.
People in general treat this topic as poison, very understandably. However, I have had a lot of people ask me detailed questions about "how do you..." in the context. I refer them to this book every time.
One more reference...there is a wire bound booklet published by Sunburst Visual Media, www.MilitaryFamily.com, entitled "Military Family Personal Organizer", copyright 2004. It is a concisely laid out booklet for recording personal, medical and financial information. It is one of the best I've ever seen. I was given a copy by my NYANG friends for doing volunteer w*rk at their family group events. I am in the process of filling it out. dh2b already has his done and keeps reminding me to finish mine.

 

[lucija]

Lusitan - I think we're more of less the same age (I am in my mid-30s) with the same type of non-interested spouse. I actually think he's quite capable on handling finances on his own and would step-up to the task (after a learning curve) if needed.

In the mean time, I have notes for him detailing all accounts (including how to access them), current positions and how to simply the allocation. I too opted for TR funds for the retirement allocation whenever possible.

At this time, I am not worried about his preretirement income stream. If something was to happen to me within the next 10 yrs or so, his instructions are to invest all life insurance proceeds as part of the retirement allocation. We carry no mortgage/other debt and my family SS benefits which they will be entitled to receive as longs as kids are under (I think) 18 should be enough for all of them to live on (even if he opts not to work, although health insurance may be an issue then).

Have you looked into SS family benefits?

The way I see it this buys him time to figure out things on his own.

Edit - I forgot to mention that once he no longer qualifies for family SS benefits, he'll have no choice but to: (1) retire permanently if he wants to and sufficient funds are available or (2) go back/continue working. In either case, there's no need for him to deal with investments related to preretirement sources of income.

 

[Lusitan]

Thanks for the reference to the Military Family Personal Organizer, freebird. I checked out that site but unfortunately it looks like that's only for bulk sales of 100 or more. I've been putting together my own organizer of sorts, so I guess I'll stick with that for now. But I'll definitely take a look at the Widow's Handbook, thanks again!

Lucija - yeah sounds like we're in pretty much the same boat, although in my case my spouse is not in the paid workforce (she works at home taking care of the kids) so that's why I'm making plans for pre-retirement income for her in the event of an unexpected early demise for me.

I have indeed considered the SS survivor benefits, but thanks for bringing that up because it's worth mentioning to anyone reading this thread. It's part of my plan for coverage of the pre-retirement income, but in our case not sufficient on its own. The extra SS income would be helpful, however, and I'm less bitter about GenX and SS after considering the value of this benefit (even if, as I hope, I never need to use it!)

 

[jdw_fire]

sooo you want simple? in this case it may be spelled SPIA -> no more asset management required!

 

[brewer12345]

I have written instructions for DW that are sitting in the same folder as the will. SPecifically, she is to take the life insurance proceeds and pay off all the debt, put the rest into a balanced fund, sell all other investments and put them into a balanced fund, and live off the income. Between portfolio income, SS survivor benefits, and the employer provided annuity in case of employee death, she would have roughly twice the disposable income we have now.

Lusitan, term insurance is extremely cheap. Buy a bunch extra to make up for the mistakes she will make and the unexpected issues that will come up.

 

[LOL!]

So with twice the disposable income, why would she want to use balanced funds? She would get killed on taxes since she would be filing single. Surely, a simple tax-efficient portfolio could be trivially managed.

 

[brewer12345]

So with twice the disposable income, why would she want to use balanced funds? She would get killed on taxes since she would be filing single. Surely, a simple tax-efficient portfolio could be trivially managed.

Not especially worried about the taxes, frankly. Note that I mentioned disposable income, not total. That means the hefty mortgage payment, etc. goes away, as do many work-related expenses. The resulting gross income after RE taxes, state tax deduction, kid-related deductions, etc. would be low enough not to draw a huge tax rate.

 

[Lusitan]

I have written instructions for DW that are sitting in the same folder as the will. SPecifically, she is to take the life insurance proceeds and pay off all the debt, put the rest into a balanced fund, sell all other investments and put them into a balanced fund, and live off the income. Between portfolio income, SS survivor benefits, and the employer provided annuity in case of employee death, she would have roughly twice the disposable income we have now.

Sounds like we're in the same boat, Brewer. I have also planned for the life inurance + SS survivor benefits to be "more than enough" with the understanding that this cushion should hopefully get her through unknown problems down the road.

The only difference is that, if I understand your plan correctly, you're thinking that your wife will invest everything into one bucket (i.e. the balanced fund) and live off of that before and during retirement. (What fund, if any, did you recommend for this?) Whereas in my case, I've been thinking of two separate buckets: (1) pre-retirement and (2) retirement savings.

I may be making it more complicated than it needs to be, but it just seemed like easy advice to tell her to keep all the retirement assets in their tax-favored plans and in a TR2040 fund; however, that doesn't seem appropriate for the pre-retirement assets because the asset allocation would be too aggressive (say, for example, if I got hit by a bus within the next few years). So that's why I was searching for a separate fund recommendation for the pre-retirement stuff.

So far, I'm sticking with the staggered fund advice I mentioned above, keyed to the year when/if I kick the bucket.

 

[lucija]

Lusitan, are you trying to set-up your wife so she does not need to work ever? Effectively, this would be a very early retirement effective with your "departure date". In this case, why not lump all of your assets in one bucket (with, hopefully, very low SWR)?

 

[Lusitan]

Lusitan, are you trying to set-up your wife so she does not need to work ever? )

Yes, that's the goal. She's not working outside the home now (she's raising the kids) and I wouldn't want her to have to return to work while the kids are young because that would be another difficult loss for them. And while I think she'd be able to jump back into the paid workforce at some point, I know that it might be tough after being out of the market for a number of years, so I'm trying to set her up for the worst-case scenario of not being able to return to work (or not being able to earn much).

Effectively, this would be a very early retirement effective with your "departure date". In this case, why not lump all of your assets in one bucket (with, hopefully, very low SWR)?

That's true, I guess that’s what I’m doing in effect. But the thing with lumping it all into one bucket, and staying simple, is that I'm having trouble thinking of the single fund (or very basic combination of funds) that would keep her assets properly allocated for such a (potentially) long "retirement" period (which could, in theory, assuming I get hit by a bus tomorrow and she lives to the ripe old age of 100, last as long as like 70 years!) while still being mostly (if not totally) "hands-off" for her, like a Target Retirement fund.

In other words, I’m trying to think of an appropriate, very simple (and auto-rebalancing) asset allocation fund given an unknown starting date and a termination date of, say 2080. The further out that starting date is, the closer it gets to 2040, the more comfortable I am with a simple TR2040 fund. But for substantially earlier starting points, I’m not sure what (if any) single fund would fit the bill, which is why I split it up into two “buckets”.

Probably just me making it more complicated than it needs to be!

 

[lucija]

Lusitan, there’s beauty in simplicity!

Have you looked into what a potential tax hit would be to have everything in a single balanced fund?

Alternatively, why not come up with a “lasting” (already in retirement) allocation consisting of 4 to 5 (broad, index) funds (MM, bonds, domestic stock, international stock, anything else you want to include)? You could direct distributions from taxable funds into MM and place tax inefficient funds in tax advantaged accounts whenever possible. I believe most brokerages offer yearly re-balancing services to a fixed allocation, so she would not have to deal with that either. This, in a nutshell, is my approach – invest life insurance + retirement accounts to set allocation and let it grow while he’s collecting SS payments (which will be sufficient for day-to-expense). It’s not all that unlikely that once SS payments dry-up, the rest of the stash will be large enough to support “retirement”.

Here’s what concerns me with your plan… whatever stash you end up with has to last a very very long time. Lots can and will change during that time… I would worry that whatever allocation/plan you come up with, may need to be tweaked in the future. At a minimum there has to me some type of “sanity check” to ensure your family is not running out of money 50 yrs down the road. In other words, someone has to pay attention --- you need to find someone else to do this for her (family member or a professional) or she needs to, at some point, get a bit involved.

 

[LOL!]

Examples of being tax-efficient in asset location can be found in this Vanguard whitepaper: http://www.vanguard.com/pdf/s556.pdf
Over a 10-year withdrawal period, a $1 million portfolio of half-taxable, half-tax-deferred could have a tax difference of more than $16,000 a year between the most tax-efficient and the least tax-efficient portfolio. Let's assume that a total "balanced" approached would fall half-way between those two extremes and the tax cost would be about $8,000 a year. That's not chump change to me.

 

[Kroeran]

in our clan the rule for unattended widows is to convert everything to simple fixed annuities, not guaranteed, spread between three or more companies with high ratings.

that way, if there is a screwup, or a gigalo, there is always another cheque in the mail next month. If the bank account is getting fat, go on a trip or help the young ones out.

a widow with a portfolio not absolutely locked up is a target

 

[Moemg]

.

a widow with a portfolio not absolutely locked up is a target

Kind of like a widower who doesn't know how to cook and still has a healthy libido ??

 

[freebird5825]

...a widow with a portfolio not absolutely locked up is a target

3 words..."It's all invested."
Next question?

 

[Nords]

Kind of like a widower who doesn't know how to cook and still has a healthy libido ??

Who cares whether or not widowers can cook?