This Spring, I was very excited about the possibility of my brother selling his first house, now a rental. In April, I offered my own opinions of what he should do with his expected windfall.
With the drop in the real estate market, it took longer than expected for the sale to finalize, but the day has finally arrived.
I figured my brother would be on easy street: no more carrying costs or paying for repairs for his old house. Not to mention, he has better cash flow with his youngest finally out of day care.
When he told me he was meeting with a financial advisor, a class mate of his wife’s, to help decide how much of their profits they could use to improve their current home, I didn’t think too much of it.
After years of reading blogs in the personal finance space, I forgot that not everyone swims in this stuff. Then we spoke last weekend, and I shocked at some of the things he told me.
I think there are some personal finance lessons to glean from his situation.
What is this?
We share the same parents, upbringing, family history. And yet, I can’t quite believe that our money history is so different.
Money isn’t for playing
For the first time in years, my brother asked me about my investments. He wanted to know if I “played the market.”
I had to ask him what he meant by that.
I do, in fact, invest in individual stocks. This is mostly an accident of history, as our father has been investing in the stock market before index funds were around.
However, I don’t trade in and out of positions very often. In fact, one could argue that my positions are pretty efficient as far as taxes and management fees, because I don’t actually generate much of either. Buying and holding stocks for 7-20+ years doesn’t leave much opportunity for these costs; though I do have to pay income taxes on dividends.
I do run the risk of seeing my investment in a particular company (several) go to zero. My portfolio holds more than 2-3 positions, though. I counted while on the phone; I am invested in 30+ companies. Not an index fund, but there is some diversification.
Anyway, my work retirement account is in a Target Date Fund. I told him to use one in his work retirement account.
I should probably circle back and make sure he isn’t using one in a taxable account, as they do rebalance and could generate taxable events (Vanguard caused a doozy at the end of 2021).
He times the market
My brother was cheap frugal before he met his wife. He made good money and lived quite inexpensively. He had money saved, which is how he could afford to overpay for his first house during the height of the housing bubble in a HCOL area.
He even put money away in a Roth IRA.
Unfortunately, he chose to move his IRA to 100% bonds ~ 15 years ago because he thought….to be clear, I don’t know what he thought.
What I do know is that he totally missed out on the 12-13 year bull run in stocks because he never reevaluated this decision. In a Roth IRA, which means that he wouldn’t have paid any taxes, ever, on any profit he realized in this account. Argh!
He doesn’t max out his 401(k)
This, I get.
He has three small children, and just finished paying for his 9th year of child care. He lives in a HCOL area. He had a money pit of a rental house, and went through 2 periods of unemployment and had some very poorly paying jobs for his field.
His wife works, but doesn’t earn enough to support the family solo.
I am not surprised that he hasn’t been able to max out his 401(k) for several years. He does, at least, contribute enough to capture his employer match. Altogether, he sees about 9% of his salary saved in that account (I hope it is getting invested in stocks [and bonds]).
Now that he ought to have more cash flow, I very much hope he will turbo charge his savings, working up to his maximum. I might have said that out loud, several times. With gusto.
He doesn’t have life insurance
This one left me gobsmacked.
He has three small children and a large mortgage. He needs to have insurance. If he were to die (ptui-ptui, avert the evil eye), his wife couldn’t support the family–not in their current home, and possibly not all that well at all.
One million dollars in term insurance would not be too much; that would clear the house mortgage, pay for my sister in law to be able to take off take from work if she needed to (because, you know, small children who lose a parent might need more attention for a while), and leave a little left over to pay for college.
Though it wouldn’t cover college costs for 3, so maybe he needs a little more.
Part of the reason I was so surprised is that I recalled he had signed up for life insurance before the eldest child was born. Unfortunately it was through his prior job, and the policy lapsed when the company was sold and he left that position.
While we were on the phone, I shopped the internet. He can probably get adequate term insurance for $60-140 per month; if he had bought this on his own 9 years ago, it probably would have been much cheaper.
(Note to self, and especially to younger people who are employed, you need your own life insurance policy. One that won’t disappear and need to be repurchased if you change jobs.)
His “financial advisor” works for a well-known national insurance company
My sister-in-law has an interest in personal finance, perhaps fueled by having to deal with large student loans for years. I figured if this advisor is someone she knew in college, they would be on the up-and-up.
Unfortunately, this person works for a large insurance company well-known on the blogs I read as…encouraging clients to buy expense whole life insurance.
I might have exclaimed quite loudly and harangued explained to my brother that this sounded like a bad idea. I sent several blog posts for him to read (both from the White Coat Investor: one on how to pick an advisor; one a “confession” from a former insurance salesperson).
He told me this person was a fiduciary. And that they paid a fee for an advising session (oh great, I thought, she’ll screw them over, and make them pay more for the privilege!).
I tried talking myself off the ledge later, trying out phrases like:
- it’s their money, they can make their own choices.
- [My sister-in-law] thinks about money, surely they won’t get suckered into bad choices.
- …maybe it’s not so bad that they are likely to be sold life insurance. After all, he still needs it for the next 10-15 years or so.
Then I called our sister (an accountant) and let her know. The first thing she said was “Oh S***!”
Not feeling super great about this.
The Recap
Let me start with some of the things he is doing well:
- Despite being strapped for cash, he still has been putting enough away in his 401(k) to get his employer match.
- He is thinking about funding his retirement.
- He is looking for help with his finances, instead of ignoring them.
Then, there are the less-than-optimal issues:
- Timing the market (and missing the bull run).
- Worrying about picking stocks (a harried working parent should pick a good index fund, or target date fund).
- Skipping life insurance when multiple people are relying on your income. Figuring they won’t have to support you later doesn’t absolve you of needing to provide for them in your absence.
- Getting financial advice from an insurance company.
It’s that last issue that makes me very nervous.
What advice would you have for my brother? For me as a worried sibling?