Fred and Edith Brown
Fred who is 73, retired a decade ago after working as a teacher for 40 years. He is fortunate to have superannuation from his 40 years of service. This superannuation is tax-paid and adjusted by the consumer price index every year. His current work related superannuation is $30,700 pa. If Fred dies before Edith, then Edith will receive half of his superannuation. If Edith dies before Fred, then his superannuation continues.
Edith is 70. While she worked before retirement, she did not have work-based superannuation.
Fred and Edith are also entitled to NZ Super. They receive $24,875 after tax.
Fred and Edith have a debt free house, with a current value of $400,000. They have $300,000 in bank term deposits. They had invested another $200,000 in five finance companies, but the finance companies are either in receivership or subject to a moratorium. They think they will be lucky to receive $50,000 in five years time.
The bank term deposits are due to mature, and they are wondering what to do as the interest rates being offered by the banks are much lower than they have been receiving. After their bad experience with finance companies, they have become more concerned about risk.
They used to have health insurance, but stopped paying as the premiums rose as they grew older. Fred has just been told by his doctor that he has prostate cancer. Fortunately, the cancer has been caught in its early stages but Fred’s outlook is worrying for the family.
Fred was born in the UK and wants to make one last trip to visit relatives. He thinks they should do the trip soon, in case the cancer means he cannot travel.
They have some old life insurance policies, but inflation has meant that these are for modest sums, that Fred and Edith regard as adequate to pay for funeral costs but not much more.
Both Fred and Edith have wills, leaving everything to each other, or if both die, sharing their estate equally between the three children.
Issues for the family
The following section sets out some of the main issues for each of the families that would need to be discussed with a financial adviser and some of the possible solutions or options to be considered. Specific solutions would require much more detailed knowledge of each family’s finances as well as discussions about their goals and priorities. Even so, this shows just how many issues there are to be considered and where the advice of experts may be helpful.Fred and Edith have done well, except for the finance company investments. Fred’s superannuation and the debt-free house provide a sound foundation. So, what are some of the issues they should consider?
Goals:
Setting goals will help them plan. Some possible goals might include:- To maintain our present lifestyle over the next 15-20 yrs subject to good health continuing.
- To protect our hard earned investment capital which may eventually be required to support our lifestyle needs (but not at present because of our combined NZ Superannuation and Fred’s superannuation).
- To also protect our wealth should long term hospital or rest home care become necessary.
- To take a trip to the UK to visit relatives.
- To replace our motorcar at least one more time to again enjoy taking ownership of a brand new vehicle and having a warranty that provides peace of mind.
- To continue being able to upgrade and maintain our home.
- To always be able to help any of our children financially whenever the situation may arise.
To achieve these goals, Fred and Edith should consider more formal planning and budgeting. This might include:
- Confirming/establishing their annual cost of living – doing a budget.
- Putting dollars against their goals, such as the trip to the UK, a new car.
- Understanding and measuring their investment risk profile/tolerance.
- Protecting and growing their investments by setting an appropriate income/capital growth investment asset split.
- Investigate whether they will need to drawdown on capital in the future, or whether they have enough income to live on. The situation may change if Fred were to die, as Edith would only receive half his superannuation.
For investments, Fred and Edith need to consider sticking to higher quality investments, especially after their bad experience with finance companies. Though they are 73 and 70, provided Fred’s prostate cancer is brought under control, they both may live for 15-20 years, perhaps longer for Edith since she is healthy. Options to be considered should include PIEs as these diversified managed funds would enable lower risk but longer term preservation of spending power.
In terms of risks – the “what ifs”, Fred and Edith need to consider their insurance. Some of the points to be considered:
- House and contents insurance is important, especially checking whether their policy provides for replacement. Older people are often eligible for discounts on insurance and there may also be advantages of having all insurance with a single company – which can result in further discounts.
- With the planned UK trip, they need to check on whether they should be informing their insurer should they be away for more than a month.
- They don’t have health insurance, and there will be issues because of Fred’s prostrate cancer. However, they may explore limited insurance cover for major medical costs, such as cataract operations. Even with cancer, they may be able to purchase a policy that provides cover, but excludes the cancer. Self insurance is an option too, but could reduce their investments.
- Their old life insurance policies should be reviewed. There may be options to convert any “whole of life” policies into endowment ones and to receive a lump sum earlier.
- They should also consider the ownership of the life insurance policies. Whose name were the policies taken out under? There may be advantages of transferring ownership so that the proceeds are available to the other partner and avoid becoming part of the estate.
In terms of estate planning, Fred and Edith already have wills. They may like to consider whether they still want all assets to be divided equally between the three children after they both die. They may want to provide for variable support, depending upon need. To achieve this and reduce the potential risk of legal challenge, they might consider creating a trust with discretion to the trustees. This could be created through the will (a testamentary trust).
What they do need are Enduring Powers of Attorney (EPAs). They need both types of EPA:
- Personal care and welfare – authorising a family member to make personal decisions if they were unable to do so, e.g. if Fred’s cancer suddenly got worse or one of them had a stroke.
- Property – authorising another family member to handle property issues. This might be very useful for the trip to the UK and is also an “insurance policy” for future events.
