Think your life is complicated these days? Consider the household of 35-year-old Amanda Capella and 34-year-old Andrew Dean. While they are fortunate to still have their jobs, unlike many people these days, the pandemic has prompted big changes to their lives, and made it tougher — but not impossible — to plan for their financial futures.
Before coronavirus upended the world, the couple had moved into the home Capella owns with her ex-spouse. Her children moved with their father to Connecticut, as part of an amicable parenting plan in which each parent takes primary responsibility for the two boys on three-year shifts.
All was calm at the home near a river in Arlington and in their jobs: Capella earns $75,000 as a software engineer for a small tech company and Dean pulls in $80,000 a year as an industrial engineer with Boeing. The couple, who are not married but have been together two years, decided this would be a good time to get their financial house in order, so they applied for a Seattle Times Money Makeover.
“How do we secure our future for our kids, for ourselves?” Capella asks. “After 2008, I’m terrified to put my money into stocks. Andrew and I both understood that we were paralyzed.”
The makeover paired the couple with Elizabeth McFadden, a financial adviser with Heritage Wealth Advisors on Mercer Island. The couple thought they were going to get help investing for retirement. When they started on the plan in January, the makeover volunteers were surprised to learn that McFadden’s approach was more holistic.
Capella and Dean are both recently divorced, and McFadden’s recommendations include getting a clear blueprint for their financial futures regarding real estate and children and ex-spouses.
“Divorce can be financially devastating,” says McFadden, who has a specialty in something called “collaborative divorce,” which uses open communication to divide assets amicably.
McFadden raised a red flag regarding Capella’s ex-spouse continuing to own half the house the couple is living in. “You may want to consider determining equity due to your ex-husband, and employ a cash-out refinance option,” McFadden said.
“Elizabeth said, ‘You need to get this house,’ ” Capella says. “Because things could change in the future. That advice gave me a lot of perspective.”
McFadden also believes Capella and her ex-husband need to get crystal-clear with custody of the boys.
“I’ve never seen a parenting plan like Amanda has with her ex, with one parent being the main residential parent for three years,” she says. Because it is unusual, it’s important to spell everything out in a legal contract and file it with the court where the divorce occurred, the planner says.
Capella and Dean took this advice in and prepared an action plan. Then coronavirus proved the adage, “The best laid plans of mice and men often go awry.”
Capella’s ex-spouse, Caleb, who is in the military and had settled with the boys where he is stationed in Connecticut, called in a panic because the kids’ school had been canceled and he couldn’t teach them at home. In the past, Capella had done some home schooling with their sons when he was deployed to Japan. Could she step in?
“Caleb and I know where our strengths are. I have some experience with home schooling. We went to Connecticut to get the kids — Andrew came with me,” Capella says.
So now the house in Arlington has the boys bouncing around and a puppy and Dean’s 7-year-old daughter staying there as well on some weekends. The couple is working from home to prevent the spread of COVID-19. They are, as Capella puts it, “thrown into a coronavirus whirlwind.”
Against this backdrop of massive change, does that mean the financial plan gets kicked to the curb?
McFadden says the pandemic shouldn’t alter the basics of the plan and in some ways reinforces the need for estate planning. Case in point: the emergency fund. Most Americans don’t have one. Federal Reserve research last year found that many households would have a hard time covering a $400 emergency.The mortgage is $1,718 a month. They usually spend $425 a month eating in restaurants, but it’s much less now that they are sheltering at home.
Capella pays $100 a month for health insurance. Dean’s is covered by his work. Capella purchased a Honda Fit for $20,000 and the couple wanted to buy a Kia Telluride, which would have cost $30,000. McFadden crunched the numbers and counseled them to delay that purchase.
The couple has some debt, but it is manageable. Dean pays $1,600 in child support a month and he has student loans that total $639 a month. Capella doesn’t have student debt because her mother passed away when she was a child and an annuity covered her education. Capella and her ex owe $281,000 on their home and, at McFadden’s urging, she’s taken the first step toward buying him out, by paying for an appraisal.
“From a retirement perspective Andrew and Amanda need to do more,” McFadden says. Capella concurs. “I have no retirement and I’m scared. Andrew doesn’t have much but he’s more calm,” Capella says.
Through his job as an industrial engineer at Boeing, Dean puts 10% of his salary into a 401(k) and Boeing provides a 75% match on the first 8%. He has $26,000 in a brokerage account and $10,000 in his 401(k). Or at least he used to.
“I haven’t looked at my accounts since this all happened,” Dean says. “It’s a retirement thing and I’m not expecting to retire for a long time.”
Capella has been saving $500 a month but she hasn’t been putting that in a retirement fund. McFadden says Dean and Capella both need to stash an additional $9,000 a year into a pretax retirement account in order to fund a comfortable retirement by age 68.
But does it make sense to invest in the future when coronavirus is putting all those scary blood-red minus signs on our account balances? You bet it does, says McFadden, especially for investors as young as Dean and Capella, because they have decades to recover from whatever this downturn turns out to be. During the roller coaster ride of COVID-19, they’ll be buying shares cheap.
“This is a huge opportunity for those who have dry powder,” McFadden says.
Capella was listening. On a particularly ugly day for the Dow, she jumped into the stock market. “I had $10,000 in cash beyond our emergency fund. I went to the Robinhood app and bought a basket of stocks that should do well over the long term. I bought things like Boeing, Netflix, Google. I pretended I was Warren Buffett, who goes in because it is so low.”
And perhaps she has the Buffett touch — in the few weeks since she hurdled into the market, Capella’s basket of stocks is up $2,000. However, that’s not exactly the kind of investing McFadden had in mind.
She counsels the couple to devote a bigger percentage of their salaries into diversified tax-deferred retirement funds. To set it and forget it. Moving forward, that’s what Capella is going to do. “The rest of my savings each month will go to my IRA,” she vows.
Of course the unknown here, the big one, is whether the couple will be able to keep their jobs as this pandemic grinds on. Capella is optimistic about her position as a software engineer for a company that makes software that dispatches nonemergency health-care vehicles.
“I don’t worry, so much of our business is embedded in my head they can’t get rid of me,” she says.
Dean is not so sanguine. As an industrial engineer, he helps the mechanics who build planes do it efficiently. And yes, Boeing is reopening plants in Washington.
That’s good, but Dean worries about what tomorrow will bring. “I felt better about our financial plan two months ago before everything started shutting down. We’ll see what happens.”
Tips: Do you have an “exit plan?”
The coronavirus has infected our lives and shined a spotlight on our mortality. Do you have what you need in place legally if you should contract the virus?
We are talking about wills and life insurance and boring yet terrifyingly vital stuff like that. Escalating coronavirus infections and deaths may have led a few more people to prepare to secure the futures of their heirs. The deVere Group, a large international financial advisory firm, recently reported a 76% spike in clients asking for wills.
However, overall only 32% of Americans have a will, according to a recent survey by caring.com, and many of the respondents said complexity and cost are estate-planning obstacles.
Financial adviser Elizabeth McFadden says there are inexpensive ways to solve this problem — not just for her Money Makeover volunteers Amanda Capella and Andrew Dean — but for anyone without a clear end-of-life plan.
“People can go to LegalZoom and spend a couple hundred bucks on a will — nothing wrong with that,” says McFadden.
With our makeover couple, the coronavirus picture is particularly murky because they aren’t married.
“If one of them were to get a serious case of coronavirus, the hospital has zero obligation to talk to the other partner, much less (let the partner) make a decision for someone who is incapacitated,” McFadden says. “Most couples who aren’t married haven’t thought about that.”
If illness leaves a person unable to tell doctors what they want, McFadden recommends a medical power of attorney. It’s a legal document that names a trusted person who can make health care decisions. For example, if Capella were incapacitated with coronavirus, her partner Dean could tell doctors what treatments she would want — or not want.
Life insurance is another element of an “exit plan.” Dean has some life insurance through Boeing, but McFadden says it isn’t enough: “In the event of Andrew or Amanda’s untimely death, current life-insurance coverage is insufficient to meet survivorship needs.”
She wants them to look into a 30-year, level-term insurance policy for each of them to cover this need.
McFadden adds: “Something else that is important for Amanda and Andrew to do is to have beneficiary designations on retirement plans. If you are married it’s automatic. If you are not married, that is not so.”
Capella and Dean say this information has given them a clear path forward.
“We don’t have plans to get married,” Capella says. “But we are committed. Now we know how to get all the rights of a married couple.”