In many families, one spouse handles the investments. As for the other spouse, he or she often has little interest in understanding mutual funds, ETFs, asset allocation, or retirement accounts. Yet what would happen if the one handling the investments were to die or incapacitated. How would the non-investing spouse handle this important responsibility?
The other day my wife and I were watching a rerun of Law & Order. During a commercial I asked her what she would do with our investments if I got hit by a truck. She quickly responded that she would do nothing with them. She’d leave them alone. Her response concerned me, so I never got to the question of how she would handle the life insurance proceeds.
Our conversation prompted me to give some deep thought on how I can help prepare her to handle our investments should something happen to me. There would be many significant decisions for my wife to make:
- Should she keep my 401(k)s or roll them over to an IRA?
- What should she do with the individual stocks we own?
- Should she consolidate accounts to Vanguard?
- How should she invest life insurance proceeds?
- Should she pay off the house?
- Where should she go for help if she needs it?
These questions prompted me to prepare a two-page document to help her answer these questions. The contents of the document are divided into six sections. Below I go over these sections so that you can prepare your own guidance for your significant other, giving you both that peace of mind.
1. Identify All Accounts
First and foremost, list all your existing accounts. For us that includes Vanguard, Fidelity, Citibank, Capital One 360, Ally, Lending Club, Prosper, OptionsXpress, and Chase. For each account, provide a short description of the purpose of the account and what it holds. For instance, our 401k retirement plan from work is with Fidelity and one of our checking accounts is with Chase.
As simple as the step may seem, I can’t stress enough how important it is. Having handled my step-mother’s estate, I know from experience how helpful it is to have a list of accounts.
As an additional tip, include the document you are preparing in a binder and add copies of the latest statements for each account to the binder. You don’t have to update the binder monthly. A year-end statement will do. What’s important is you’re able to show your significant other a fairly recent balance with all the pertinent information, such as account numbers and contact information.
2. Life Insurance
There are two important pieces to life insurance. First, your spouse should be able to find the policy and know who to contact to file a claim. That’s the easy part. Second, give them some guidance on what to do with the proceeds. In our case, the big questions are whether to pay off our home and how to invest the rest.
2.1 Whether to pay off the mortgage
While my wife is more than capable of making this decision on her own, I know she would appreciate my guidance. Whether to pay off the mortgage is an important decision.
What I will likely suggest is that she go ahead and pay off the mortgage with the insurance proceeds. It will give her peace of mind, be one less thing she must deal with, and provide her with more confidence to invest the rest knowing that the home is secure.
Beyond the mortgage, there may be other debts to consider as well. School loans, car loans, and credit card debt can be significant burdens for many. Some guidance in these matters now can go a long way to helping your spouse deal with these financial matters later.
2.2. How to invest the remainder
Presuming there will be proceeds from the insurance policy after the expenses are paid, how do you invest the rest of the money? This will be one of the more significant challenges for my wife. She has never invested on her own and has no interest in doing so, which brings me to the next topic.
3. Investing: DIY vs. Getting Help
Will your spouse invest on his or her own, or will they get help? There is no right answer to this question. Some will need and want significant help, while others will feel comfortable handling investments on their own. Since we are talking about the spouse that doesn’t handle the investments, however, it’s likely that many will want help.
The key is to discuss this issue ahead of time. By addressing this issue now, you can either give your spouse guidance on whom to hire or provide information on how he or she can invest on their own. We look at both options below.
4. Decide NOW who they will get help from
If your spouse decides to get help, it’s good to have some of these decisions made ahead of time. Not only can you be part of the decision, but it is also much easier to make these important decisions when your spouse is not dealing with the pain of the loss.
For my wife, I’ll recommend that she use a Vanguard Advisor. The cost is modest (30 basis points), and I trust Vanguard’s approach to investing. There are of course other options.
5. Investment Plan
If your spouse would prefer to invest on his or her own, you can put together a simple, easy-to-follow investment plan. Even if you think your spouse would seek help from advisors, putting this section together will still come in handy. It can help them evaluate any investment advice they receive.
There are several things to consider for this section of the document.
5.1 Information Overload
The “other” spouse often doesn’t want to hear details about asset allocation and expense ratios. They are not going to have that patience for this level of detail. On this point I speak from experience. The key is convey the critical information in a way that will be helpful to them.
5.2. Be specific (identify the specific investments)
You don’t have to go through concepts like high-level asset allocation theory. Instead, lay out specific funds you have that make up your investments. You may have ten different funds now because that’s how you like to handle your asset allocation, but you could tell your spouse to streamline the investments. Here are several options
Target Retirement Fund: Take all the other retirement funds and consolidate them into a single fund such as a target date retirement fund. This is arguably the easiest approach.
3-Fund Investment Plan: While a little more complicated, the 3-fund portfolio is very easy to construct and manage. As the name suggests, the strategy involves just three mutual funds: (1) a U.S. stock fund, (2) a U.S. bond fund, and (3) a foreign stock fund.
Using Vanguard funds, one might divided investments equally among the following mutual funds:
Vanguard Total Stock Market Index Fund (VTSMX)
Vanguard Total International Stock Index Fund (VGTSX)
Vanguard Total Bond Market Fund (VBMFX)
5.3 Individual stocks
If you own individual stocks, a decision should be made in advance about how your spouse will handle these investments. There are likely tax issues involved as well. I know that my wife will have no interest in managing these investments, so my advice to her is to sell them, pay the capital gains, and incorporate them into Vanguard assets.
Regardless of your approach, the key is to have a plan in place.
5.4. Income Need
Consider that while you may not take any income from your investments now, your spouse may be in need of immediate income should you die. It could mean a slightly more conservative asset allocation or a slightly different investment option on the bond side.
More importantly, one of the things you can do in this section of the document is to educate them on how much they can safely withdrawal each year from the investments. I can assure you that my wife is not well versed on the 4% rule. But working with a Vanguard Advisor, I’m confident they can prepare an income plan consistent with her needs and available assets.
6. Retirement Accounts
Apart from investment decisions, a spouse will also need to decide how to handle retirement accounts. Should they be consolidated into an IRA? Should he or she elect to title the retirement accounts in their own name or treat them as an inherited IRA? These questions should ultimately be answered by a financial planner (Vanguard has CFPs that can handle this, too). But here are some thoughts on these important questions:
6.1 Options: Inherited vs Retitled
A spouse has two options with retirement accounts. They can either treat them as an inherited IRA or have the account retitled in their own name. There are advantages and disadvantages to both approaches. Often the decision comes down to when the spouse will need the money and the spouse’s age.
Advantage: Your spouse can withdraw money from it before turning 59 ½ without paying the 10% penalty. With an inherited IRA, your spouse would be required to take distributions either over a 5-year period or over their expected lifetime.
Disadvantage: The downside of an inherited IRA is that because you have to start withdrawing money immediately, your spouse will be required to pay income tax on the distributions. If they don’t need the money until reaching retirement age, retitling the IRA may be a better option.
Advantage: If your spouse retitles the IRA in his or her name, it will be treated as their IRA and be subject to all of the familiar rules with such an account. The upside, unlike an inherited IRA, is that the spouse is not required to start taking the required minimum distributions until reaching 70 ½.
Disadvantage: If the spouse will need some of the money before reaching 59 ½, they could end up paying the 10% penalty.
Once you’ve completed your 2-page plan, find time to discuss this with your better half over a cup of coffee. They may not follow your options, but the whole point is to invoke these conversations and think about these issues now in order to give them a clear path on what to do should they take over all of these investments on their own.