By most standards, John and Edie Broadwater were leading the good life: a nice house in Bethesda, a retirement property in Florida, a boat, a six-figure income, a hefty savings account, a substantial stock portfolio and just one more year's college tuition for their only child.
Then disaster struck. Edie, 60, a teacher at a private elementary school, was diagnosed as having Alzheimer's disease, a slow, incurable, progressively debilitating malady that often requires nursing or institutional care. John, 57, wondered how he would be able to provide for his wife's future needs without drastically altering the family's lifestyle.
Could they afford $2,200 a month for a skilled nursing facility when the time came, an endowment to produce a monthly income of $600 for daughter Marilee, $15,000 tuition for her last year of medical school, plus $50,000 for a round-the-world tour the couple wanted to take while Edie still was able? Would all this be possible if John opted for early retirement immediately?
Father and daughter decided to consult a financial planner.
Their case, which typifies the concerns of many people approaching retirement today, formed the basis of a recent study exercise conducted by the Washington chapter of the International Association for Financial Planning. The case study, prepared by Cavill and Co. Chairman Ronald W. Cavill and two associates, was based on a real family's situation, but the names and some circumstances were changed.
About 75 lawyers, insurance agents, stockbrokers, accountants and other professionals, most armed with financial planning degrees or credentials, immersed themselves for eight hours in the problems of the Broadwater family.
During a mock interview with colleagues impersonating the Broadwaters, the planners elicited the following objectives:
*John is adamant about touring the world for six months, starting in January 1986.
*He declines to sell the Bethesda house so long as Edie is living there; he doesn't want to sell the boat or the Florida lot where he may some day build a retirement house.
*After 30 years with the same company, he wants to retire, and rules out taking just a year's sabbatical leave; he also doesn't wish to do consulting work now.
*Marilee, 29, plans to become a missionary doctor and spend the rest of her life in Africa; she insists that she will be able to support herself and wants her inheritance given to charity.
Several planners were heard to mumble that the daughter should stay home to care for her mother or get a job. There was a suggestion that the world tour be shortened. John Broadwater was reluctant to indicate which of his objectives had higher priorities, however. The planners agreed their job is not to make judgments but to assist clients in reaching their chosen goals.
Detailed financial information provided by the family included a statement of assets and liabilities, a family budget, tax returns for 1984 and projections for 1985, retirement and health benefits, an inventory of life insurance policies and a list of stock holdings.
Their asset statement showed $146,894 in checking and savings accounts, $72,675 in the cash value of life insurance policies, and investments of $519,680, including $156,302 in stocks and $348,547 as the value of John's pension. The value of their house was listed as $288,000. Other assets brought the total to $1,032,374.
From this was subtracted their mortgage ($28,645), a margin loan from Edie's stockbroker ($31,473) and other loans, all amounting to $79,954. Assets minus liabilities, or net worth, equaled $952,420.
In 1984, the Broadwaters together earned $115,726 and paid $39,616 in income taxes. In 1985, when Edie stopped working, their income dropped to $82,931. Taxes for 1985 were estimated at $24,290. The family budget for the whole year was calculated at $76,434.
Working in small groups, the planners endeavored to match assets and goals. They considered the adequacy of the family's insurance coverage, the return on Edie's aggressive stock portfolio, and the various ways in which John could take his pension. They also debated ethical questions such as whether to work with the Broadwaters' good friend and insurance agent who had not provided the best coverage; whether to transfer the wife's considerable stock assets to her husband, and whether to disclose in advance all commissions to be derived from products recommended by the planner. The answers to all these ethical questions were affirmative.
There was no consensus, however, on procedures. For example, almost all thought John would do better to take a lump-sum distribution from his employer, roll it over into an Individual Retirement Account or opt for a 10-year forward averaging on his taxes. They thought any of the annuities offered by his employer as an alternative would yield less. On the other hand, planners seemed equally split between canceling all the insurance policies in favor of term insurance with the premiums paid from current cash values, and converting all existing contracts to single-premium policies in which the cash values accrue interest at market rates.
Given the unpredictable nature of Alzheimer's disease -- it may or may not shorten a victim's life span -- the participants were reluctant to devise a plan for the Broadwaters' finances extending more than five years. "They ought to be able to accomplish their goals for that long without selling the Bethesda house, but if both live a long time there could be financial difficulties," one adviser observed.
Among the strategies was one fashioned by a team headed by Margaret Welch, a certified financial planner with the brokerage firm of Smith Barney. The solution focused on the 26 months between November 1985 and January 1988 when John Broadwater would reach age 59 1/2 and could begin withdrawing money penalty-free from the IRA he had to set up with the lump-sum distribution from his employer.
Before John reaches the required age, the family could use available assets for living expenses. According to Welch's projections, expenses over the next 26 months would amount to $203,742 at current inflation rates.
John could cut their budget by an additional $4,293 annually by using the cash value in his life insurance policies to buy single-premium insurance, leaving the additional cash value in the policy to compound for use in an emergency.
Finally, besides a recommendation that the couple's wills be updated, the planners advocated the creation of a trust for Edie's insurance policies, because it is unlikely she would be able to manage her own assets. They decided another trust was indicated for the couple's remaining assets at their deaths. These should be left in trust for Marilee, who would have the power to revoke the trust should she change her mind about spending the rest of her life in Africa and claim her inheritance.