Written by Steven J. Case, CLU, ChFC, CFP, CDP

You may feel the loss of your spouse most acutely when it comes to financial matters. Money is directly tied to our inner sense of security and well-being. Perhaps that is the reason that so many people are “bad” with money.

What they are saying is that money scares the hell out of them. They’re afraid they won’t have enough, afraid someone will steal it, or that their friends will find out how much or how little they have.

With so many emotions attached to money, it’s not surprising that people fail to properly address their money issues. These same people will blindly turn their money over to near strangers so they don’t have to deal with it.

They are vulnerable not just because they don’t know much about money and finances, but because they don’t want to know.

You may have happily relinquished all financial responsibilities to your spouse when you got married only to have it dropped back in your lap at his or her death. It is common to be angry at your late spouse for dying and leaving you to make important decisions alone. If your spouse was in charge of your family finances, you likely have little or no background in financial matters and may only vaguely understand your sources of income and monthly expenditures. Even if you were the financial manager in your household, the death of your spouse dictates that you rethink your financial future.

Your spouse’s death may impact your income from wages, Social Security and pensions, leaving many unanswered questions: Do you have enough monthly income? Do you need to work? Will you have to invade principal to maintain your current lifestyle? Are your investments appropriate for your new life plan? These and other questions are answered in a process known as “financial planning.”

The objective of this chapter is to give you a greater comfort level in the financial realm, to be able to choose a capable financial planner to assist you, and be able to adequately judge his or her performance. Ultimately, you must take control of your money. You need to know what’s going on, not just to avoid getting fleeced, but also to effectively manage your money. You shouldn’t spend too much or too little. It would be a shame to deprive yourself of life’s pleasures because you (wrongly) feel that you can’t afford them. Knowing what you have allows you to live within, not above or below, your means.

The following are the basic elements of financial planning:

1. Determine your net worth.
2. Determine you monthly sources of income and expenditures.
3. Define your future goals.
4. Determine if your current investments are properly suited for your new life plan.
5. Minimize financial risk through diversification.

Unless you have extensive training in financial matters, you will need help developing your financial plan. Although well-meaning friends and family may offer suggestions about the management of your money, investments that have worked for them may not fit your situation. Financial planning isn’t about picking winners -- that’s called gambling. Financial planning involves the five steps described above and requires that you make a plan that is right for you.

Choosing a financial planner may be one of the most important decisions you will make after your spouse’s death. Stories of widows who have been taken advantage of by unscrupulous investment advisors abound. Solicit recommendations from friends and family and interview three candidates. Choose someone who is experienced, licensed and credentialed. Make sure to review “Choosing a Financial Planner” at the end of this chapter.

Without question, money is the number one source of anxiety for widows and widowers. What is the fear? The fear is of the unknown, and the antidote is knowledge. That is not to say that you need to become a financial planner. You only need to understand what you have, what you need and where you’re going. To start, you need to assess your current financial position and develop a written plan.

The first step is to determine your “net worth.” Net worth is simply the value of your assets less liabilities. The information you gathered on your “Asset Inventory with Values Worksheet” in Chapter Two is your starting point. You should also gather the most recent statements for each asset and liability. Look for bank, brokerage, IRA, 401(k), credit union, as well as mortgage and credit card statements. This information is part of the mosaic of your current financial position. Keep these statements handy, since either you or your financial advisor may need them to contact the financial institutions for more information.

DETERMINE MONTHLY INCOME AND EXPENSES

Determining your monthly income and expenses is more difficult than determining your net worth. If you’re like most people, you don’t know where the money goes each month. No, you probably don’t have a hole in your wallet! You probably use the “pay as you go” budget method, hoping that you don’t run out of money during the month. Record your cash inflows (income) and outflows (expenses), including non-monthly items.

For example: if you pay $2,400 in annual property taxes, divide the cost by 12 to arrive at a monthly property tax expense of $200.

If you are computer literate, programs such as Quicken and Microsoft Money are excellent for helping you keep track of your income and expenses. You can even pay your bills online. For the first few months, keep a detailed journal of your daily expenses to get a clearer picture of where you are spending your money. If your total income exceeds expenses, you have a surplus that can be earmarked for savings.

If your expenses exceed your income, you are practicing “deficit spending,” and immediate corrective action is required.

DEFINE YOUR GOALS

What are your personal and financial goals? Although it may sound like a simple question, very few of us ever take the time to plan our future, let alone commit our thoughts to writing. Once you know where you’re going, finding the right path is rather straightforward. On the other hand, as the old saying goes, “if you don’t know where you’re going, any road will get you there.”

If your future seems cloudy, and you are having difficulty identifying your personal and financial goals, here’s an exercise: Start by dreaming. Put your dreams in writing. Be specific. What do you want? How much will the goal cost? Set a time frame to reach the goal. Organize your dreams by category (personal life, career, health, financial standing) and prioritize them. Create a written action plan. Implement your plan.

Review the plan regularly and monitor your progress. Adjust the specifics of your plan if necessary. And finally, celebrate your accomplishments!

In order to set financial goals, think about the following:

1. When do you want to retire?
2. How much money per month do you need?
3. What large purchases do you wish to make (college, second home, car, vacations)?

The following example illustrates the power of a written plan:

The senior class at Harvard University was surveyed about their life goals. The results showed that only 3% of the class actually had clear, established goals and had them in writing. The other 97% may have had goals, but they were not clear and were not in writing. Twenty years later, the same group was resurveyed. The results showed that the 3% who had clear, written goals had lived happier, healthier, and more fulfilling lives. In addition, the survey also showed that this 3% had a cumulative net worth that exceeded that of the other 97%—combined. (Source: Body For Life: 12 Weeks to Mental and Physical Strength by Bill Phillips and Michael D’Orso).

You must determine whether you can maintain your current lifestyle after your spouse’s death. In all likelihood, even without planning, you’ll be fine for the time being. The question is whether you will continue to enjoy the same lifestyle for the rest of your life. Answering the question of whether you can get there from here requires a detailed analysis of your current assets, your sources of income, your spending habits, the anticipated rate of return on your investments and a projected inflation rate.

Short of going to work (or to continue working), your plan should call for you to “not touch principal.” Although the exact definition of “principal” is open to debate, the concept is clear. If you spend more than you take in, you erode your nest egg. Once you start spending savings, you begin a descent that ends with your running out of money. Like a downhill skier, you pick up speed as you go. Less principal means less income. The lower your income, the more you erode principal, and so on and so forth.

Despite your best-laid plans, some factors like inflation, stock market fluctuations, and unforeseen emergencies are outside of your control. The key is to minimize these risks with a diversified investment strategy and adequate insurance.

Diversification, described more fully below, is the process of investing in different investment vehicles (guaranteed investments, stocks, bonds, mutual funds, and real estate), in various sectors of the economy (drugs, industrials, high tech, banking, municipal, utilities) in such a way as to minimize the risk that any one sector will suffer a significant downturn. One only has to remember the fall of high tech stocks in 2000-2001 to be reminded that having all of your eggs in one basket can be a risky practice.

Clients often hold stock of their current or former employer. Whether out of company loyalty or as a result of a company-matching program, these clients may have a significant portion of their net worth invested in a single company. Although they may feel safe, in reality they are exposing themselves to substantial risk. They could be wiped out if their company experiences a severe downturn.

In addition to being diversified among a variety of investment types, sound investing dictates that you monitor the amount of your investment in each category. A tried and true paradigm of investing is the “investment pyramid” shown below. Basically, start at the bottom. Only when you have fulfilled your need at a given level should you move up to the next level.

Insurance is at the base of the pyramid because you must first protect yourself from unforeseen events (such as death, disability, illness and an extended nursing home stay) that could threaten your financial security. Estate planning must also be in place to assure your family’s well being in the event of your permanent disability or death.

Once your insurance and estate planning needs have been satisfied, you should have sufficient liquid investments and cash reserves to cover your short-term needs in the event of an interruption of your income. The amount of your readily accessible cash will depend on your other sources of income including Social Security, pension, and IRA minimum distributions (see Chapter Six, “IRA and Retirement Distributions”).

Next are mutual funds, stocks and bonds owned outside of your IRAs and 401(k)s. Assets in this category are less accessible than cash and passbook savings, and may result in capital gains when liquidated, but are subject to a lower tax rate than distributions from IRAs, 401(k)s and annuities that generate “ordinary” income.

Annuities, IRAs, and 401(k)s follow. With twenty years of IRA and 401(k) savings, this category is the fastest growing category of assets in the United States. Special planning is necessary since distributions from these assets are subject to income tax. We have seen over-saving in this area, with clients afraid to touch their vast retirement savings for fear of paying tax on the distributions.

Two important points need to be made about retirement savings: First, retirement savings should be used!

They’re intended to supplement your Social Security and pensions, so work out a systematic withdrawal program and add the distributions to your monthly income. You’ll have to start taking it anyway when you turn age 70 ½ (see Chapter Six). Next, integrate retirement accounts into your overall investment strategy.

It’s all your money! Make sure that your assets as a whole satisfy your needs.

Once your financial house is in order with insurance, liquid investments and your long-term growth portfolio, you then have the luxury to invest in more speculative investments if you are so inclined. Naturally, speculative investments such as oil and gas, limited partnerships and commodities should constitute a very small portion of your portfolio and should only be invested with money you can afford to lose.

Again, the key is diversification. To protect against inflation (see below), you shouldn’t hold only low-risk, low yield investments. Nor should you hold only high-risk investments. The proper mix depends on your risk tolerance, your age and your income needs.

Inflation is the rise in the price of goods and services over time. Your spending power will erode if you fail to account for inflation in your financial plan. For example, an investment portfolio weighted too heavily in favor of low-growth, low-risk investments is vulnerable to inflation.

To illustrate, if Bev invests $10,000 in a certificate of deposit (“CD”) paying 5% interest, compounded annually, she will earn $500 in interest in her first year. If Bev is in the 28% tax bracket and we assume an inflation rate of 5%, she actually lost ground financially. She paid $140 in income taxes ($500 X .28 = $140) resulting in $360 (the original $500 interest less the $140 owed for taxes) of “net investment income.” Now consider that Bev’s initial investment of $10,000 is not actually worth $10,000 in today’s dollars due to inflation. Assuming a 5% inflation rate, Bev would actually need $10,500 to have the same spending power as she did one year earlier. Since her portfolio grew by only $360, Bev actually had a real rate of return of a negative 1.40% after taxes and inflation. Her income and portfolio are growing, but the cost of goods and services is growing at a faster rate. Bev is slowly losing ground.

INVESTMENT RISK

It is often thought that as risk increases, so does return. Actually, higher risk gives the potential for higher returns, but it also creates the potential for higher losses. That is not to say that higher risk investments such as individual stocks do not have a place in your portfolio. Historically, stocks and other “equities” (see below) have out-performed all other investments, earning a rate of return in excess of ten percent. Since low risk investments rarely offer even the potential for high returns, you cannot achieve diversification without some amount of risk. The key is to determine the level of risk you can live with.

Everyone’s risk tolerance is different. Your risk sensitivity may be quite different from your late spouse’s, and may have changed since your spouse’s death. The key is to achieve the rate of return to meet your short-term and long-term goals, without incurring a level of risk that keeps you up at night.

DIVERSIFICATION

The most effective way to minimize investment risk (including the risk of inflation) is to diversify your investments. By combining different investments you can insulate your portfolio from fluctuations within asset types. The benefits of diversification are illustrated by the following comparison of two portfolios. The first is diversified, containing 50% stocks and 50% cash (e.g. CDs and Treasury bills).

The second is non-diversified, with the entire 100% invested in stocks. Each portfolio will invest $100,000 for two years. In the first year, the market grows by 20% while the going interest rate is 5%. In the second year, the market declines by 20% while the going interest rate stays constant at 5%.

Let’s compare the two strategies and see what happens:

Despite a stock market downturn of 20 percent in Year 2, the diversified portfolio lost only 7.5 percent. The non-diversified portfolio lost the full 20 percent.

TAX CONSIDERATIONS

Income tax must be factored into your financial plan. Distributions from IRAs (other than Roth IRAs), and 401(k)s are fully taxable. The interest on municipal bonds is tax-free. Annuity payments are part taxable and part tax-free. The portion of the annuity payment reflecting your “investment in the contract” is tax-free, while the portion representing growth on your investment is taxable as ordinary income (see more about annuities in this chapter).

YOUR FINANCIAL PLAN

Your financial advisor will develop a financial plan taking into consideration your net worth, income needs, risk tolerance and future goals. The plan should contain specific investment recommendations. Depending on how you are invested, some of your investments will need to be converted to fit with your plan. Life insurance proceeds and any retirement distributions received by you on account of your spouse’s death (whether or not they were rolled over into your own IRA) will likewise be invested according to your plan.

To implement your plan, you and your advisor will choose a diversified mix of the various investment options described below in “Understanding Investments.” Once your plan is in place, you should meet with your investment advisor no less than annually to assess your changing needs as well as changes in the market.

Future investment choices will be made based on the quality of the investment under consideration as well as whether it’s consistent with your financial plan. With your financial plan in place, you are the captain of your ship tacking your way to your destination. Following your financial plan will minimize the risk of market downturns and allow you to live the life you have chosen for yourself.

With a plan, you are better able to resist the temptation to purchase the investment du jour or “time” the market based on the headlines in the morning paper or a television commentator’s financial outlook. The daily news is a snapshot of current events that naturally distorts the long-term view of investing. History has proven that market timing is nearly impossible, and should definitely be avoided.

The following chart illustrates the remarkable opportunities lost if you were out of the market on some of the highest-rising market days of the past decade:

The message is clear. Chart a course and a plan and stick to it. Review your plan regularly, but not less than annually and adjust your plan as needed to account for changes in the market and your life.

Various investments are used to diversify your investment portfolio and to implement your financial plan. It is important to understand your investment choices as well as their role in your financial plan. The following several pages highlight the various major investment categories.

GUARANTEED INVESTMENTS

Generally, guaranteed investments are a good place to put money for the short term, if, for instance, you plan to use the money to make a large purchase in the near future. Common guaranteed investments include money market accounts, passbook accounts, certificates of deposit and treasury bills.

MONEY MARKET ACCOUNT

Money market accounts pay an adjustable interest rate. The funds are readily available all the time without penalty. The FDIC generally insures money market funds but you must check in each case to be sure.

PASSBOOK ACCOUNT

Like the money market account, this account also pays an adjustable interest rate and the funds are readily available without penalty. The interest rate is generally lower but more stable than a money market account interest rate.

CERTIFICATE OF DEPOSIT ( CD )

A certificate of deposit is a fixed amount invested at a fixed interest rate for a fixed period of time, e.g., 6% annually for 2 years. The funds are not liquid; that is, they are not readily available to you. In exchange for “giving up” ready access to the funds, the interest rate is usually higher than for a money market account. If you liquidate a CD before its maturity date, there will likely be an interest penalty. CD interest rates are more predictable than money market and passbook account interest rates because the rate is fixed at the time you invest. CD deposits also are usually FDIC insured.

TREASURY BILL

A treasury bill is a short-term obligation of the United States government, paying a fixed interest rate for a fixed period of time. Treasury bills are often thought to be very safe investments because they are backed by the full faith and credit of the United States government. These fixed income securities have maturities ranging from 30 to 365 days and are free from state income tax.

BONDS

A bond is an “IOU” generated when an investor lends money to the bond issuer. Bonds pay a fixed interest rate and have a fixed maturity date. Bonds are generally low-risk, stable investments that return steady income. Bonds are issued by various companies, or by federal, state and local branches of government. Bonds generally mature anywhere from ten to thirty years from the date of issue. A Note ranges in maturity from one year to ten years. By investing in a bond or note, you receive a fixed interest rate and the return of your original investment (principal). The interest on most state and local government bonds is tax-free. However, the interest rate paid on such “municipal bonds” is generally lower than that available on corporate bonds and other guaranteed investments such as CDs. Generally, the higher your marginal income tax rate, the more attractive tax-free bonds will be.

There are a number of risks in buying bonds. First, the company issuing the bond could experience a financial hardship that would jeopardize repayment of the bond interest or even the principal. Secondly, as interest rates rise, the value of your bond decreases. However, the reverse is also true, with bond values increasing as interest rates decline. Companies with questionable credit that must offer a higher rate of interest to attract investors issue high-yield or “junk” bonds. Such bonds pose a substantial risk of default. The length of time until maturity of the bond is an important factor. The longer the maturity, the greater the influence of changing interest rates on the value of the bond. Much like stock mutual funds (see below), bond mutual funds offer a diverse portfolio of bonds with varying interest rates and maturity dates. You must be aware, however, that a bond mutual fund does not have the same characteristics as an individual bond. Bond mutual funds do not offer a fixed interest rate and never mature.

Equity means ownership. As the holder of an equity investment, you participate in the profit and loss of the underlying entity. There is no guaranteed return on equity investments. If the company is profitable, and is thought to be a good investment by other investors, the value of the stock goes up. If the company is not profitable or is not regarded as a good investment by the markets, your investment goes down. Although equities involve a certain amount of risk, over the last century, they have proven to be the best-performing long-term investment vehicle. Listed below are a few different types of equity investments.

STOCKS

A share of a stock represents an ownership interest in the issuing company. Stockholders own a portion of the issuing company and participate in its profits and growth. Stocks are categorized by their “market capitalization.” Market capitalization is the number of outstanding shares of a company multiplied by the share price. Companies with a capitalization under one billion dollars are generally considered “small cap” stocks. Companies with assets of between one and ten billion dollars are “Mid cap” stocks, and companies with assets in excess of ten billion dollars are “large cap” stocks. Historically, large cap stocks have tended to be older, more stable companies. The most desirable “blue chip” stocks continue to be older large cap stocks with a consistent track record of profitability such as IBM, Wal-Mart, General Motors, etc.

MUTUAL FUNDS

Mutual funds offer you the opportunity to own a variety of stocks and bonds through a single investment. A professional money manager oversees the fund and makes investment decisions. Your choices are dizzying, with well over 12,000 mutual funds from which to choose. Interestingly, there are more mutual funds than there are individual publicly traded stocks!

Each mutual fund has its own investment philosophy, which must be clearly defined in the fund’s prospectus. For example, a growth fund must invest primarily in stocks. A capital preservation fund must invest primarily in certificates of deposit. Balanced funds may invest in a variety of securities such as stocks, bonds, and international securities, while maintaining a cash reserve for flexibility. The key is to purchase quality funds that match your risk tolerance and investment objectives.

The first step in evaluating a fund is to compare it against the track record of similar funds over a designated period, usually the last 3 and 5 years. Although past performance is no guarantee of future results, it is the best available indicator (unless you have a crystal ball). You can find this information in the fund’s prospectus.

A much more accessible source of performance information is Morningstar, which ranks mutual funds in a number of categories using a one-to-five-star rating system. You can find these rankings in the reference section of your library. Morningstar’s web site, http://www.morningstar.com also has a wealth of data designed for novice as well as experienced investors.

Other than the commission on purchase and sale, there is no cost in holding individual stocks. Gain on the sale of stocks held for more than one year are eligible for long-term capital gains tax treatment. In contrast to stocks, mutual funds charge an “internal” annual fee, and you have no control over whether the mutual fund manager sells issues during the year, exposing you to short or long term capital gains. Despite these apparent shortcomings, the diversification and ongoing management available in mutual funds makes them extremely attractive.

To properly diversify a stock portfolio, you would have to identify and research hundreds of companies and invest over $200,000. For example, to purchase 100 shares (extra costs and commissions are incurred if an “odd lot” of fewer than 100 shares is purchased) of stock in 40 different companies with an average share price of $55 you would have to invest $220,000, plus commissions. Once purchased, you would have to monitor each stock and make adjustments as necessary to account for changes in the market.

Apart from diversification, mutual funds offer ongoing affordable professional management. It is the fund manager’s job to monitor the fund on a daily, if not hourly, basis. Fund managers are immune to the emotional attachments that individual investors often form with individual stocks. For these reasons, mutual funds (or managed accounts discussed below) should form the basis of your investment portfolio, with individual stocks purchased only if you have substantial investment in the stock market.

Managed accounts are similar to mutual funds in that they use a professional investment manager who follows a particular investment strategy. The difference is that the securities in a managed account belong only to you, as opposed to a mutual fund that commingles all investor’s money in a single fund with each investor owning a share.

Because the investment manager works only on your account, managed accounts typically require a minimum investment of at least $100,000. The annual fee for managed accounts is usually between two and three percent of money under management. The fee covers all commissions and internal fees.

LOAD VERSUS NO LOAD

All mutual funds charge their costs of operation to the fund. Management fees are measured as a percentage of the value of the fund, and are known as the fund’s “expense ratio” and “trading costs.” Such expenses are said to be “internal” since they are not charged directly to the investor. The expense ratio and trading costs are typically between 2% and 3% of annual assets under management. You won’t see the expense ratio on your statement. Instead, it will offset your annual return.

LOAD FUNDS

Some funds have a front-end commission, or “load,” that is charged directly to investors. Such load funds can charge commissions up-front (called “Class A” shares), or at the time of sale (“Class B” shares). The “back-end load” on Class B shares is assessed against your account if you sell the investment within the “contingent deferred commission” period. For example if you invested $10,000 in Class B shares with a four year, 4% contingent deferred charge and liquidate the account after one year you would pay a $400 commission (4% times $10,000). There would be no sales charge at all for money left in the account for five years.

NO LOAD FUNDS

No-load funds do not pay commissions. In theory, all of your dollars are working for you rather than being eaten up in commission. In reality, no-load funds must be evaluated based on their historic rate of return and their internal expenses. Some no-loads are a bargain while others lag in the only category that matters: net investment return. Unfortunately, with no brokerage fees to be earned, you’re typically on your own when it comes to evaluating no-loads.

An annuity is a contract between the investor and the insurance company whereby the insurance company accepts a lump sum payment from the investor in exchange for a systematic stream of income payments to the investor usually beginning at retirement. Money invested in the annuity accumulates on a tax-deferred basis.

Annuities can be used to supplement your Social Security and pension payments. Annuities are best when used during life for retirement or other monthly income needs since the unused portion does not receive a stepped-up basis at the owner’s death. There are several different types of annuities to meet various financial needs that fall into two broad categories: deferred annuities and immediate annuities.

DEFERRED ANNUITIES

The term “deferred” refers to the fact that monthly annuity payments will begin at some future date. Income earned during the deferral period is not taxed until paid. For an additional fee, paid to the issuing insurance company, the annuity will provide a death benefit to a beneficiary of your choosing. There are three different types of deferred annuities: variable annuities, fixed annuities and market indexed annuities.

VARIABLE ANNUITIES

Variable annuities are invested in professionally managed stock and bond portfolios, called sub-accounts. The value of a variable annuity changes with the value of the sub-accounts. Since dividends, interest and capital gains remain invested until you make withdrawals, you control when income taxes are paid. Remember that withdrawals of taxable amounts will be subject to income tax, and prior to age 59 ½, may be subject to a 10% penalty tax. Variable annuities are by far the most popular type of annuity sold today.

FIXED ANNUITIES

In exchange for a lump-sum payment (or periodic payments) to an insurance company, a fixed annuity offers a competitive interest rate for a specified time period, usually 1, 3, or 5 years. Fixed annuities preserve principal and lock in a guaranteed rate of return.

MARKET INDEXED ANNUITIES

Market indexed annuities are tied to the performance of the market as a whole as typically measured by the “S & P 500.” Indexed annuities offer a guaranteed return in the event the market performs below the guaranteed target rate. The guarantee allows investors to participate in the upside growth potential of the market without the downside risk.

IMMEDIATE ANNUITIES

A lump-sum deposit establishes the immediate annuity, which provides payments, either at a fixed or a variable interest rate, typically on a monthly basis. With an immediate annuity, income stream payments begin right away. The first payment must be made within one year of purchase. Immediate annuity payments may be for a specified period, or for the greater of a specified period, or your lifetime.

REAL ESTATE

Historically, real estate has been an excellent hedge against inflation, and is a good investment if you are able and willing to undertake or continue the responsibility of ownership. The federal tax code accorded preferred tax status to your principal residence, allowing you to deduct mortgage interest and property taxes and forgiving the first $250,000 (single) or $500,000 (married) of gain on sale. Additionally, your principal residence is not counted for Medicaid eligibility purposes (see “Medicaid” in Chapter Twelve). The economic, tax and emotional advantages of owning your own home, condominium, or co-op are compelling. More than a mere investment, your home should be a permanent part of your investment portfolio.

Investment property such as apartments and commercial buildings can add diversification to your investment portfolio and provide protection against a down market. Investment real estate is often thought of as a “tax shelter” in that profits can be offset by the “depreciation deduction.” However, despite the investment and tax benefits or investment real estate, you may simply be unable or unwilling to take on the management responsibilities associated with ownership. Investment real estate is not like a stock or other passive investment. If you own investment real estate, you must be actively involved with its day-to-day management.

You should consider selling investment real estate inherited from your spouse if you are not equipped to manage it yourself or if your new life plan doesn’t include the active management such properties require. Your new stepped-up basis (see “Stepped Up Basis” in Chapter Two) will allow you to sell your investment real estate with little or no gain.

TANGIBLE INVESTMENTS

Tangible investments are those you can touch, such as gold, silver, coins, stamps and collectibles. Historically, these investments have been an excellent hedge against inflation. The reverse is also true: during periods of low inflation, tangible investments tend to perform poorly. Additional problems with tangible investments include lack of marketability, difficulty in determining value and inability to produce income.

A WORD OF CAUTION

Some investments are simply too risky for the vast majority of surviving spouses. You should not invest in limited partnerships, commodities and investments that are not publicly traded. You should respectfully decline any invitation to invest in any closely held (that is, not publicly traded) business. Such enterprises are not regulated and involve an inappropriate level of risk.

If a family member or close friend is asking you to invest, you should defer to your attorney, accountant or financial planner, and let them decline on your behalf. Don’t worry about being the bad guy. Worry more about being the poor guy.

As noted in Chapter Four (“Settlement Options”), you will be given the option to take your late spouse’s life insurance benefit in a lump sum or a variety of monthly distribution options. You may have a similar option with respect to your late spouse’s company retirement plan. Which option is right for you? The answer depends on your confidence in yourself and the confidence you have in the insurance company or your late spouse’s employer. You may also have the same decision in your company retirement plan.

The problem with the various non-lump-sum settlement options is that they are inflexible. Once you elect to take a monthly payment, you cannot adjust the amount or the timing of the distribution, and they are not adjusted for inflation. Non-lump-sum options also tend to end at your death, leaving no legacy for your children. Unless you have no children and/or no faith in your ability to manage money, you should elect to receive your spouse’s life insurance death benefit in a lump sum.

For these same reasons, and for the reasons discussed in the following chapter (Chapter Six: IRA and Retirement Distributions), you should also elect to take a lump sum distribution of your late spouse’s IRAs and retirement accounts and roll them into your own Individual Retirement Account (IRA).

Naturally, the election to take lump sums makes you responsible for your own future. You must exercise immediate control of the distributions and integrate them into your financial plan and investment portfolio. Without the security of a monthly check for the rest of your life, your long-term financial well-being rests squarely on your shoulders. However, you and your heirs will benefit from these decisions if you properly manage the distributions.

If your spouse was eligible to receive a traditional pension from his or her employer, call the benefits department of the company and determine the value of the benefit. Pension distributions, like IRA and other retirement distributions, are taxable to you when received. Although taxable, IRA and retirement account savings are there to be used in your retirement. Don’t be afraid to spend this money to make a better life for yourself while you can still enjoy it.

CHOOSING A FINANCIAL PLANNER

Choosing a financial advisor is one of the most important decisions after your spouse’s death. Choose someone with experience, someone with roots in your community, someone you trust and who will take the time to work with you. All financial advisors have to be compensated. Nonetheless, it is important that you understand how he or she is compensated so that you can judge whether their recommendations are motivated by their compensation.

Generally, financial advisors are compensated in one of three ways:

1. On a commission plan, the advisor earns money from the purchase or sale of investments. A commissioned advisor should be expected to monitor, adjust and review your portfolio on a regular basis. The temptation of unscrupulous commissioned planners is to “churn” accounts (i.e., unnecessarily buying and selling investments) in order to generate commissions. Be aware of activity in your account. You should only grant your commission-based advisor the power to transact in your account without your permission if you have a long- standing relationship, and the planner has proven his or her trustworthiness.
2. On a fee plan, you may be offered several options including a flat fee for the financial planning service, an hourly rate or a percentage of assets under management. The last option would motivate the planner to increase the value of your portfolio, which is also in your best interest.
3. Under a combination plan, the advisor charges a fee to develop a financial plan, and also receives a commission to help manage the recommended investments.

There is no right or wrong way to compensate a financial advisor. Whom you choose should not be dictated so much by how they are compensated but on the basis of their experience, track record and the services to be provided. Retain an advisor who will take the time to develop a financial plan that takes into consideration your spending habits, risk tolerance, and your life plan. Work with someone who will monitor your plan and make specific recommendations based on changes in the market and in your short-term and long-term financial needs.

Experience counts. Ask about specific professional experience, length of time in financial planning and with their current firm. Inquire whether the advisor has a college degree, and what licenses and designations they hold. For example, to obtain the “Certified Financial Planner” or “CFP” designation, the advisor must have passed a rigorous series of exams and must meet ongoing continuing education requirements. Although degrees and professional designations are no guarantee of planners’ future performance, at least you will know that they have dedicated time and effort to their craft.

Most firms require that client accounts remain with the firm when a advisor leaves or changes firms. You should know in advance how the transfer of your account would be handled in the event your advisor leaves his or her firm.

Inquire about the number of support staff available to administer your account while your advisor is away from the office.

Ask about the procedures for discontinuing the association. How will your sensitive documents be returned and how quickly will you receive them? Are you entitled to a refund of fees if you are dissatisfied?

CONCLUSION

You financial security is key to your future. It is area in which you literally cannot afford to procrastinate. Start by locating a competent financial advisor that you can trust. Work closely with him or her to develop a written financial plan.

Ask questions until you are satisfied that you fully understand your advisor’s recommendations. Continue to develop your money skills.

The fact that you have a financial advisor or advisors doesn’t absolve you from the ultimate responsibility of controlling your own financial destiny. Knowing where you stand and having a plan will lead to a fuller happier life. Good luck.