After misstep, numbers now work for retiree
When her 68-year-old mother started talking about refinancing her house to get some extra cash for a trip out West, Lisa Palmer decided it was time to take a closer look at her mom's finances.
Her initial worry was that most of her mother's money was tied up in annuities and a whole life insurance policy. ''It's my understanding that those are two of the worst places for retirement money," she said, explaining why she requested a Boston Globe Money Makeover for her mother Margaret Isabelle of North Reading.
But as financial adviser Stephen Ahern of Sullivan Bille Group in Tewksbury began unraveling Isabelle's finances, the picture got a lot more complicated. Isabelle, a part-time church secretary who earns about $8,400 a year, had initially sought financial advice from a church-affiliated financial services company. The company representative, who had previously sold her insurance, had done just what she had asked -- provided her with additional income. But in doing so, he had used $120,000 of tax-sheltered individual retirement account money, locking her into a low-interest-rate immediate annuity that only guarantees payments until 2011.
''He didn't do the planning," said Ahern, who is president of the Financial Planning Association of Massachusetts, explaining that sometimes what you ask for and what you actually need are two different things. By using IRA money to buy the immediate annuity -- an insurance product that provides a guaranteed income stream for a set period of time -- the adviser not only wasted the tax advantages of the IRA but also locked her into a low 3.29 percent return.
''So now what do I do?" Isabelle asked as her financial picture became clearer. Unwinding the annuity would probably be too expensive, Ahern said. But Isabelle had plenty of options for putting her other assets to work, thus helping her to stay financially self-sufficient for the rest of her life, he said.
Isabelle had done well in buying a long-term care insurance policy, which will cover her should she need nursing home care in her later years. But she no longer needs the paid-up whole life insurance policy that cost her $60,000 back in 1985. ''Your kids are grown and you have no dependents," her daughter told her. ''Nobody needs anything."
So Ahern suggested Isabelle explore something called a 1035 exchange, which would allow her to convert that whole life policy to a variable deferred annuity. Like the insurance policy, the annuity is a tax-advantaged investment so the transaction wouldn't trigger taxes. But this type of annuity would expand her choice of investments, which would grow tax-free until the money is withdrawn.
''You do it for the investment options," says Ahern, recommending a no-load or low-load annuity such as those available through financial services firm TIAA-CREF.
To create more income, Ahern said Isabelle should consider pulling $60,000 out of the paid-up insurance policy and use that money to pay off the mortgage. Because she would only be tapping the initial insurance investment, there would be no taxes on the withdrawal. But paying off the mortgage, which currently has a 6.27 percent interest rate, would save Isabelle $400 a month. ''It's a guaranteed return of over 6 percent," Ahern said.
To cut monthly expenses, Ahern said Isabelle might want to think about reducing the $350 of monthly charitable contributions made primarily to church-related organizations. ''That's high at your income level," he said. Another potential area for savings, added Isabelle's daughter Palmer, are gifts -- often to grown children and grandchildren -- now budgeted at $50 to $100 a month.
Looking at the charts and account statements spread over the table, Ahern told Isabelle that the numbers work in her favor. ''This is a lot of paper that basically shows that you are fine," he said. ''But don't touch your retirement accounts until you have to."
And, cautioned Isabelle's daughter, ''Don't refinance the house to take a trip."
To be considered for a Money Makeover, fill out the form at www.boston.com/business/personalfinance, or call 617-929-2916 and ask for an application. 
