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A parent left alone — a Moneywise family plan

This week, Moneywise features a new monthly series on financial planning and investing advice. We want to make managing finances much more applicable to personal circumstances by using real stories from real people. The first financial planning story features one of our readers who has written to me seeking help and has agreed to allow a discussion of the composite situation.* If readers would like to participate in future financial planning composite cases, contact me confidentially via e-mail. The next Financial Plan Analysis is scheduled for July 12, 2014.

The case:

• widower age, 56

• two children: a daughter in a doctoral programme on a partial scholarship, the other, a son two years away from college, currently in private school, also on a partial scholarship

• modest home, no mortgage

• second-hand car, owned outright

• part-time job - compensation about $3,000 a month, hours fluctuate on flex-schedule, limited medical insurance coverage

• widower annuity - $1,000 per month

• Savings account - certificate of deposit. $200,000

The Planning Situation. Our reader tells us: “Regrettably, my wife passed away about 18 months ago, after 30 years of marriage leaving our family grieving her absence, while trying to manage a household of three with just one wage income going forward. Fortunately, we had a moderate insurance policy on her life that was enough to liquidate our remaining mortgage. Recently, my working hours were also reduced to part-time. Given the slowdown in the local economy, my employer and business has been struggling to remain solvent. The only thing I am able to focus on right now and my only goal at this time is to ensure that my children complete their education so that their financial future is assured. I provide all funding in excess of our oldest child’s doctoral scholarship, and I am responsible for the remaining costs of private school. My son will attend Bermuda College, in two years, then head overseas for his final three years. I need to invest the savings in a way that will generate the highest return. Can you help?”

We look at the facts of this case. Then, we start with - no, not investing advice - that comes last, but with the big questions - the what ifs?

A. What if our reader loses his job? He is 56. Older workers are often not considered as efficient, cost effective and malleable as younger workers. Can he find another job in this depressed economy, preferably one that is full-time with benefits? How long can he survive completely out of work with the financial resources he has saved?

B. What if he gets sick? Statistics on immune functions and resistance to illness, note that men are at greater mortality risk following spousal bereavement.* Chronic stress also promotes this. What happens to the children’s financial support if he develops a terminal illness?

C. What if he cannot manage a budget on the monthly income produced now? What is his monthly cost of living? Is he able to save anything? From the scant information provided, and projecting current living costs, it appears that he has no flexibility for savings.

D. What if he has to tap the savings for emergency funding? Any financial crisis will demand breaking that CD to supplement living expenses.

E. Does he have any life insurance, or disability insurance to protect his children? None stated. No life insurance leaves the children extremely vulnerable with no recourse to ready cash for current expenses. See the will section as well. Bermuda does not sell disability insurance, nor could he probably afford it at this point in time.

F. Does he have health insurance? Part time workers may not be able to afford medical care. This means he may have already adopted the ‘take some medication, but not others’ in order to save money. And heaven forbid if you have to see a doctor. Better to avoid the whole medical thing (and hope for the best).

G. Does he have a retirement pension? If he does, he could consider collecting, but he would have to state that he is retired, a strategy that he is not prepared to do. Even if he decided to receive his pension distribution the low interest rates combined with annuity costs may actually generate a negative return. However, he must continue to work.

H. Does he have a will with a guardianship clause? None noted. His minor child may not be cared for, or properly protected if he passes prematurely with out a will or a designated guardian. Additionally, just to make ends meet the beneficiaries, and possibly a court-appointed guardian will have to sell the family home, in order to support the two children’s needs. Real estate property does not sell well in a depressed market. The property could be on the market for a significant amount of time. What will the children use for living expenses if the cash runs out?

I. He is now sole owner of their home. Has he applied for the Primary Homestead Residency Certificate to protect his children’s inheritance in the event of his premature death?

After reviewing all of these questions and possibly obtaining additional information, we now look to see what investments, if any, would be appropriate for his financial security.

The request is for high returns. In capital market terms, that equates to high risk. The ultimate capital return might be terrific, but the risk of severe losses is also enhanced in a decelerating market environment.

US stock markets as at Thursday maintained strength at near highs. The market has become complacent according to the pundits, meaning the thinking is that stock market risk is low now; that perception could change at any time if a significant market event happens. When global markets fall in value after an event, they tend to become more positively correlated. Simply put, all securities go down in value - on paper. During those times, there tend to be more sellers than buyers in the market looking to liquidate security positions, exacerbating downward security valuations. Is this a good time to plan for our reader to invest in the market?

Next: The Recommendations. We evaluate the reader what-ifs, provide some planning recommendations, and then focus on investment planning.

*Disclosures regarding receiving a Royal Gazette Reader Financial Plan Analysis. First, names and all personal circumstances have been altered to protect individual identities and confidential personal and financial information.

Second, while the reader case can be reviewed, in a general sense, it is understood that I take no responsibility for the eventual decisions and outcome made by the reader.

Third, I do not recommend any specific investment or planning product, nor do I receive or pay referral fees of any kind. This plan is provided strictly to raise public awareness and to incentivise individuals to take charge of their own personal financial plan.

** (Kiecolt-Glaser and Newton, 2001).

Martha Harris Myron CPA CFP JSM Masters of Law: International Tax and Financial Services, Summa Cum Laude

Appointed to the Professional Tax Advisory Council, American Citizens Abroad, Geneva, Switzerland

President: The Pondstraddler* Life™ Consultancy providing international financial planning for the challenging lifestyles of multinational individuals and their families residing, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle. Specific focus for residents of Bermuda, the premier international finance centre. www.pondstraddler.com Contact: martha@pondstraddler.com

* Pondstraddler. A person with one foot on each shore whose heart resides in both countries*

Father and son reading a Bible. Photo: Gino Santa Maria