Til financial ignorance do us part
For some older couples, one spouse is ‘in charge of' the money and the other is disengaged and not interested in understanding the couple's financial situation. Jacqui Irwin writes about the benefits of a step-by-step analysis to remedy the situation.
As a financial planner, I meet lots of clients every week and I notice, particularly with older couples (over 65), that duties are divided with one spouse being "in charge of" the money and the other often quite disengaged and not interested in understanding the couple's financial situation.
Better education and technology mean many more people have a wide array of different structures, tax concessions, and financial products to grow and manage their wealth.
So, it's not uncommon for a couple to have a self-managed super fund(SMSF), a company or two from various successful or not-so-successful business ventures over the years, together with a family trust, and a negatively geared property thrown in for good measure.
They will also usually have various investments acquired on life's journey, recommended by well-meaning friends, accountants, or advisers.
Whereas over time these structures and investments may have led to greater wealth, they've also led to more complexity, particularly as people retire with many of those investments still in place.
Problems arise if the spouse in charge of the finances either dies or loses capacity and leaves the non-financially savvy spouse in charge.
In this demographic, that surviving spouse is likely to be a non-financially engaged woman (in Australia in 2014 around 40 per cent of women aged 75 to 79 were widowed).
At my annual or bi-annual reviews with clients over the age of 60, I am now asking the question: "If your spouse died or lost capacity tomorrow, would you feel confident taking complete control of the family finances?".
If the answer from the non-financially engaged spouse is "no", then I suggest that we talk about what can be done to remedy the situation.
Step 1: Family balance sheet
The first step is to put together a family balance sheet. As their financial adviser, I already have a listing of their assets and liabilities as a starting point but, as my focus tends to be on investable assets, this list is probably not complete. However, I offer this list as a starting point and we then add the other assets and liabilities to produce a complete listing.
At the bottom of the balance sheet I also list the couple's insurance policies of which I have details and ask them to expand on this and add all the other insurances they may have — including health, property, vehicle, etc. With older couples, life or income protection insurance are frequently no longer in place.
This activity forces the non-engaged spouse to focus on the couple's assets and liabilities, possibly for the first time, and start to come to grips with their financial situation.
So, if the couple's financial situation is complex, then as the ‘financial' spouse is attempting to explain the complex situation to the non-financial spouse, she/he begins to realise how complex it is and to ask "Do we really need it to be this complex" "Can we start getting rid of some of these structures and investments?".
Step 2: Wind-up and sell-off
This usually leads to the second step which is to look at winding up some of these structures and selling off redundant investments, a process that can take some months.
Then at the next review I produce an updated financial balance sheet (and insurance listing), ask the non-financial spouse if she/he is happy with all assets and liabilities on the list and if she/he understands:
- How those assets or liabilities work;
- Why they have them;
- Whether those assets/liabilities enhance their situation; and
- What the plans are for those assets/liabilities.
If they can't answer these questions about some of the investments or structures still in place, then I ask the financially savvy spouse to explain the investment to them again.
If the non-financial spouse does not ‘get it' by this stage, then I start a discussion around whether that investment is the right one for them going forward. Perhaps it is too complex or sophisticated? Would a simpler investment still deliver comparable results?
At this meeting, we also start the next stage, which is to educate the non-financial spouse about the couple's income and expenditure. This is done by taking the updated balance sheet, asking them to look at each asset and see what income stream it is producing. This gives us the income side. Then we list all expenditure and outgoings so that at the end we have a family income and expenditure statement.
In a lot of long-standing relationships, the non-financial spouse has been given a set amount of money by the financial spouse every month for lifestyle expenses, but has no idea of what the other costs of running the household are, or if the couple is currently living within their means or beyond their means and drawing down on their capital. Because of this they are making uninformed decisions about what the couple's money is being spent on.
Once we've been through this exercise, the previously non-financial spouse starts to take ownership of the larger spending decisions for items such as overseas trips and the couple's finances improve as a result.
Step 3: Fear of dependency
The next step is to look at what would happen to this income and expenditure statement and the couple's balance sheet, if one partner died or became incapacitated.
Research done with older Australians has shown that they are not afraid of death — what they are very concerned about and find difficult to discuss is the later years of retirement, when they may be either partly or wholly dependent.
To address their initial reluctance to discuss this, I present them with the table below from the Australian Institute of Health and Welfare.
By starting with this table and showing them the projected outcomes for the ‘average' Australian, they can begin to see how many years they may have to fund both their partial and then complete disability.
At age 75 they could be looking at about five more disability-free years and then around nine years of partial then almost total disability.
I also discuss a very common situation after the death of a spouse: the surviving spouse will usually face a fall in their income (usually through an Age Pension reduction) without a proportionate fall in living expenses so that they will suddenly find it harder to make ends meet.
By going through their income and expenditure statement line by line and looking at what income would be lost and which expenses would be reduced in the event of a death, it's often clear that the surviving spouse may not be able to continue with the same lifestyle and some planning can be done.
The same applies to planning for a future loss of capacity. In this instance, it is usually enough to consider the income and expenditure statement as the first stage in a loss of capacity and it is usually to remain in the family home and access home care. This first stage may also mean higher medical costs and some once-off costs to modify the home, but these can normally be funded from the couple's current income, particularly as other lifestyle costs, such as travel, will normally be curtailed.
It is also useful to reassure clients by discussing the government assistance to which they would be entitled given their current income and asset levels. This allows them to realise they won't have to fund all these costs themselves.
Most older Australians don't realise they can access some level of subsidised home care, regardless of their income.
This situation will become more beneficial from 27 February 2017, when changes to the funding of home care packages will lead to more choice in home care providers and more flexibility to change from one provider to another.
Step 4: Preparing to plan
This will lead into a discussion about what happens when the person can no longer be cared for at home, needs to enter residential aged care, and how much this is likely to cost. The fees can be broken down into two components. First, initial entry fees are paid for an accommodation bond. This can currently be funded by either a lump sum accommodation bond, which may mean the sale of assets, or as a daily fee.
Then there will be the ongoing care fees, and if these cannot be funded by the couple's income then other forms of financing such as reverse mortgages and age care loans can be discussed.
Depending on the couple's ages and level of capacity, this may lead to decisions about the restructuring of assets or income to fund these next stages.
By starting the education process for the non-financial spouse early, the couple will be better prepared for the various financial decisions that they will have to make as they progress through these different stages, both as equal partners or if they are left as the sole decision-maker.
After we've been through this education process, couples feel happier and more secure, plus they have more confidence in their relationship with their planner and a better relationship with their families who previously worried that they would be left with the responsibility for these decisions.
Jacqui Irwin is a financial planner at Fiducian Financial Services.
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