Monday, December 3, 2012

Your Advisor’s Good Intentions Could RUIN Your Life

Your Advisor’s Good Intentions Could Ruin Your Life
Let me begin by saying that I believe the vast majority of professionals in all fields – including finance – are great folks who desire to help their clients achieve the best results. Sure, you have the occasional Bernie Madoff, but that’s not the norm.
However, if your advisor lacks expertise in a specific subject area, good intentions alone won’t make much difference. By expertise, I mean a thorough understanding of the subject, successful real-life outcomes in the specific area, as well as the ability and foresight to address all relevant aspects to prevent a situation where, in the process of fixing your front door, they end up weakening the entire foundation of your house and potentially setting you up for a major disaster. That’s a broad definition, but it’s how I define expertise.
I was recently consulting with a couple on one aspect of the husband’s retirement. In our very first meeting, they told me that upon the advice from several advisors, they’d decided to go the pension maximization route, as opposed to his employer’s survivor annuity.
Under most pensions, you have two basic choices. The first option is income for life, for yourself only. Option two is that when you died, your spouse would continue to receive payments for life; however, it would be a lower income, usually half of what you had been receiving. Income for yourself only would be much higher than the joint-lives scenario. For example, let’s say payment to yourself only is $1,000/month. Or under joint-lives, you'd receive $800/month, and when you died, your surviving spouse would then receive $400/month.
Pension maximization basically proposes – if it makes financial sense – that you take the $1,000 under the yourself only option and purchase enough life insurance to replace the payments your spouse would otherwise be receiving, at a much lower cost than $200/month (the difference between $1,000 and $800). Say you were able to do that for $100/month. You would end up with $900/month (the $1,000 yourself only payment, less the $100 life insurance payment) instead of the $800/month joint-lives payment, and when you died, your spouse would turn the insurance death benefit into an annuity of equal or even higher income.
Sounds like a good plan, doesn’t it? Let the record show that I’m not against pension maximization. In fact, I have recommended it to some of my clients over the years. BUT, like many other strategies, it can sometimes be a terrible idea – and this was one of those occasions.
You see, in this particular situation, the employer in question was the state government, whose healthcare would also cease for the surviving spouse on the death of the husband. Spouses continue to receive healthcare ONLY if they’re receiving a survivor’s annuity, however little it may be. So we must factor the cost of private healthcare into the equation, since the wife is still 10 years from Medicare eligibility. Might the husband die before then? We hope not, but since we don’t have a crystal ball, we can’t rule it out, can we?
Here’s the thing: I don’t believe for a second that the other advisors this couple consulted with were being dishonest. So what else might explain such a huge oversight that could potentially set the couple up for a major disaster? I’m only guessing, but could it be lack of expertise?
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