Jonathan farmed for the first 35 years of his life and had spent the last 10 years working full time at the co-op. Although the pay was not very good, it did provide health insurance for his family.
Jonathan had never been able to buy farmland during his farming career. He rented 250 acres most years and lived with his wife on an acreage, which was paid for.
Jonathan had not been an extravagant spender, nor was he a focused saver. His entire retirement plan amounted to $90,000 — about $50,000 in a retirement plan and about $40,000 in the bank.
At 65 years old, Jonathan planned to work until he was 75. The extra 10 years of earnings would complete his retirement plan.
As soon as he was eligible for Medicare, he slowed down to only working part time at the co-op.
At the end of the planting season, Jonathan took his entire family white water rafting on a local river.
Toward the end of their second run down, Jonathan’s kayak flipped sideways and then turned upside down. He struggled to get himself back up above the water again.
Just as he succeeded in coming to the surface, another kayak crashed into his broadside. The nose of the other kayak hit him right near his hip.
Eventually, Jonathan was able to make it to the shore but was unable to get out of the kayak. His family came to the rescue and took him to a local hospital. It turned out that his hip had been broken in several places.
Over the next few weeks there were several surgeries, and by the end of the summer he was able to walk again with the aid of a cane. He spent the fall doing physical therapy with thoughts of returning to work in the spring.
By midwinter it was clear Jonathan was done working.
As the winter months went by, his mind was troubled by how his family would survive and what he needed to do.
Jonathan was also very susceptible to TV ads and advice from patrons of the local coffee shop.
Jonathan came up with a few steps to put his life in order as he prepared for the next stage. Unfortunately, they were not good steps.
He was concerned with how his family would be able to bury him after he died.
A friend strongly suggested he make all his funeral arrangements now and pay for them. He also suggested Jonathan buy his cemetery plot and a monument to go there. This seemed very reasonable to Jonathan.
Not wanting to touch the $40,000 he had in the bank, he took $25,000 out of his pension plan to pay for everything.
Jonathan’s next concern was the future cost of nursing home care. Fearing the worst, he purchased an expensive plan. He did not want his life’s savings wiped out.
Because Jonathan had not been good at budgeting throughout his life, he now gave no thought to how he was going to pay the significant premiums the next 15 years.
Jonathan’s next concern was buying life insurance. An insurance agent convinced him to buy a policy with a $100,000 benefit. Jonathan then felt confident knowing each of his three children would receive $33,000 each at his death.
Had he looked ahead, he would have noticed the premiums for this policy were more than his budget could sustain.
Some of his more prosperous friends at the coffee shop took their families on dream vacations. Jonathan decided his family should have the very same experience.
He took $20,000 of additional money out of his pension plan and booked a trip to Hawaii for him and his wife along with their three kids, their spouses and the seven grandchildren. The trip was memorable, and everyone had a great time.
Some of Jonathan’s children struggled with employment and living within their means. When one of his children lost a job or needed money, they were soon at Jonathan’s house asking for help.
Without much thought, he gave over $15,000 to his children so they would not lose their house, boat or camper. Jonathan reasoned that this was the purpose of parents. They should help their children when they were needed.
On the one-year anniversary of his kayaking accident, Jonathan reevaluated his finances. He now had only $5,000 left in his retirement account and only $25,000 left in the bank.
The only good news was he did not owe any income tax, which was a small consolation for all that occurred.
What could Jonathan have done differently?
First, he did not really need the expensive long-term care insurance.
Those who do not have a lot of money do not need this insurance. Its purpose is to protect the heirs from having all the estate go to the nursing home. In Jonathan’s case, even a short stay at the nursing home would wipe out all of his resources.
The cost of the premiums would be more than the value his estate.
Second, Jonathan was not the first person to fall victim to a life insurance salesperson.
It is a fallacy to believe your heirs deserve some money at your death, whatever the cost. Jonathan should have been less concerned about his children and more concerned about how he and his wife were going to pay for their retirement needs.
Third, Jonathan was not wise in preparing for his funeral.
If you live in Iowa or the Midwest and you die, someone will bury you. If your family does not have money to pay for an expensive funeral, there are some very reasonable alternatives available.
Spending the money you need to live on for the next few years to prepay your funeral expenses is a poor choice.
Fourth, taking your family to Hawaii is like keeping up with the Joneses. If you have the financial ability to do these things, then it is great. But if you have not budgeted for a trip, then it only compounds the problem.
There will always be someone with more money, more family trips and a bigger house.
The last flaw in Jonathan’s plan involves giving money to his adult children.
When your children are in their mid-40s, you should not be bailing them out of financial troubles whenever they call. If they haven’t learned how to budget by that age, giving them $15,000 of your money will not help them in the long run.
Everyone should have a reasonable retirement plan. It may change over the years, but the fundamentals should be based on correct financial principles.
A good plan will provide more options in the future. Jonathan’s plan will only work if he and his wife die at a young age or plan to move in with their kids in the next few years.
Bob Dunaway and Associates offer estate and retirement planning. Gary Johnson can be reached at 563-927-4554 or by emailing him at firstname.lastname@example.org.