Martha’s Investment Income

August 26, 2018

Today, I was referred to talk with a client’s mother. As they say in the movies, to “protect the innocent,” we will give her a fictitious name. Let’s call her Martha.

Martha is 80 years old. She has been a widow for over 30 years and lives by herself in the same home she and her husband bought together when they were newlyweds. She lives on a fixed income, that consists of social security and a small pension her deceased husband left her.

Martha was referred to me because she wants to get more income out of her investment account. She holds $60,000 in a taxable account, which consists mostly of bond mutual funds. Martha is a conservative investor. She recently visited a financial advisor at another firm, who suggested that she use a combination of bank CDs and a small amount of equity mutual funds. And she wanted to know what I thought of that recommendation. The recommendations she received seemed logical on the surface, but I explained that we don’t make recommendations without first having a full and complete picture, so I proceeded to ask some more questions. Through that process, this is what I learned:

Martha has no credit card debt or car note, and in fact, she has been driving the same car for 17 years. Her home is paid for except for a $20,000 home equity line of credit (HELOC) – which she took out to make repairs and upgrades over the last few years. Her payment on her HELOC is $450/month. Martha has about $2,000 cash in the bank.

Since she is a conservative investor and estimates that her bond mutual fund portfolio supports 4% withdrawal rate from her $60,000 account per year (income is her objective from her account). Given that information, 4% of $60,000 is only $2,400/year or $200/month. I explained to her that if she somehow found one of the smartest and brightest advisors in the world, it would be unlikely that most any advisor could move the needle very much on a $200/month draw from her $60,000 investment.

Rather, I turned my attention to her debt. Think about it like this: She’s paying out $450/month to pay on her HELOC debt. And she’s only drawing $200/month from her investment. To me, that’s just simple math and it’s not a good deal. It’s unlikely, as a conservative investor, that she can earn a return that is greater than the interest that she pays on that HELOC loan.

Simply put, I think the elimination of the debt would do more to help her bottom line than it would be to change investment portfolios. Because once she pays off the debt, she might not need to pull income from her investment account – which may increase the account over time through reinvested dividends.
The moral of the story is this – as an experienced CFP® Professional, I find that if I ask more questions and listen, the answer to a client’s financial question may be within reach. And those solutions are not always found in a financial product. Sometimes, a little bit of common sense might just be the right prescription.
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