Widow is ready to move on financially

It’s been nearly three years since her husband died of colon cancer, but Pamela Walton hasn’t taken his voice off the answering machine. She still wears her wedding ring.

Only recently has she considered her financial future.

Stephen Walton left his wife a modest life insurance policy and a manageable mortgage.

But as the fog of grief begins to lift, she worries about whether she’s properly managing the money. A stay-at-home mother who taught mathematics on and off during her nearly 30-year marriage, Pamela Walton now needs a full-time job.

“When your spouse dies and part of your income disappears, you panic,” she said. At this stage in her life, Walton had envisioned traveling to academic conferences with her husband, who was a solar astronomer, and building savings for retirement.

Instead, at age 54 she’s going back to school to get a master’s degree so she can teach full time. She’s also commuting more than an hour each way to a part-time job.

“It’s so difficult to make financial decisions when you’ve undergone a trauma, because at that point you’re just in survival mode,” said Jennifer Hartman, a financial planner with Greenleaf Financial Group in Los Angeles, who reviewed Walton’s finances.

Last year Walton suffered another emotional setback when her father died.

Despite the upheaval in her life, Hartman said, Walton hasn’t made any major mistakes with her money.

She receives about half the income she did when she was married, taking in $48,000 annually from her husband’s pension and from part-time teaching at a community college. After paying off her mortgage, she stashed the remaining $170,000 of the insurance money in savings, money market and checking accounts. She has nearly $30,000 in retirement accounts and no debt.

“Paying off the mortgage was fine,” Hartman said. “Many people buy life insurance to do just that.”

Walton has only ballpark estimates of her expenses, a liability as she navigates a future with uncertain income.

Though she hasn’t frittered away her money, she hasn’t kept track of it either, Hartman said. Last year she splurged on a $9,000 trip to Egypt with two of her sons, which she felt was good for the three of them after their loss.

“She now has to conserve those insurance funds; otherwise they could easily get drawn down to zero,” Hartman said.

Currently Walton is meeting her expenses and those of her two youngest sons, who are in college and still living at home. But she’s unable to save. What’s more, she is unsure how to plan for her own retirement. Walton said she would like to have about $60,000 a year to live on in retirement, but Hartman said that was unrealistic.

Even if Walton is able to work full time as a community college mathematics teacher after she finishes her degree, she’ll have only 10 years before retirement -- too short a time to build up a large nest egg.

Still, she will continue to receive $24,000 annually from her husband’s CalPERS pension.

If she preserves her insurance money and it grows at a real rate of return of 2%, Hartman said, she conservatively can draw down 4% annually, starting at retirement age, for a total of about $32,000 in dependable retirement income. The rest will have to come from other pensions that she might earn, Social Security and additional savings. Hartman estimates that Walton could receive $40,000 to $50,000 in retirement income.

“If you don’t have to pay a mortgage and live frugally, that’s a reasonable amount,” Hartman said.

It’s crucial that Walton preserve her nest egg and create a household budget. But she is frugal and always has been, and that will help her money last.

The Waltons met in their 20s and built their life around his academic career. Because housing costs around Cal State Northridge, where Stephen taught, were too high, they moved an hour away to Lancaster. They bought a five-bedroom home for $160,000 in the early 1980s and settled in, raising four boys and devoting their spare time to the Boy Scouts.

Pamela Walton worked sporadically, but mostly they lived on his salary, which peaked at about $100,000.

The couple drove their Toyota Tercel for 23 years and saved religiously on staples such as food and clothing. She half-jokingly confesses that she still wears clothes from the 1970s.

Hartman suspects, however, that Walton may be spending more on her sons than she realizes. Walton said she helps them out with gas, cellphone bills and other essentials. She dreams of paying off their school loans one day. Her two older boys, who are 23 and 25, carry school loans totaling about $60,000.

Right now Walton can’t afford to pay off her sons’ loans, Hartman said. She needs to focus on getting a job and saving for retirement. She also needs to reorder her finances. On the personal side, Hartman said, Walton needs to continue to process her grief so she can make sound and emotionally detached financial decisions.

“I would encourage her to find a social network that really understands what she’s going through,” Hartman said.

Financially, Hartman recommends Walton figure out her cash flow by tracking her expenses for a month and looking through her checkbook and credit card statements for annual expenses, such as car registration and vacations.

Because there are so many unkowns -- including the potential of a move to another city at some point -- Hartman says Walton should keep the insurance proceeds accessible in a single money market account that earns decent interest.

Hartman also recommends that Walton roll over about $15,000 of her retirement funds, now in a 403(b) account, into an individual retirement account so she can reduce fees and have a broader choice of mutual funds. She should also reallocate the money. Almost all of the 403(b) money is currently invested in stocks. Hartman recommends Walton put 30% to 40% of it into bonds, depending on her risk tolerance. The remainder of her retirement money, currently in another IRA, should be similarly rebalanced.

Even though Walton would draw down her insurance funds by doing so, Hartman also encouraged her to use $6,000 from her insurance proceeds to fund a Roth IRA. Because some funds can be withdrawn from Roth IRAs without penalty, Hartman recommends that Walton use a money market account so she can get access to her money in an emergency.

There’s other financial housekeeping for Walton to do. She needs to look into disability insurance for herself as well as draft wills and a powers of attorney, Hartman said. She also needs to encourage her 23-year-old son, who does not have health insurance, to buy a policy. Hartman said a policy could run $50 to $100 a month and would save Walton from paying for any major medical expenses should something happen.

Luxuries like the trip to Egypt might have felt healing, but Hartman said Walton shouldn’t take on such expenses in the near future.

She encouraged Walton to take up a hobby to help ease her sadness and grief, and Walton said she had recently become interested in hang gliding. Although it is expensive, the planner said it could be accommodated within a budget.

Walton said she now has a clear picture of what to do to keep her finances in order.

She plans to begin working on her budget and investigate disability insurance. Then, she said, she’ll begin picking away at the other items on her new list of financial tasks.

“To a certain extent when you lose a spouse, you also lose a bit of confidence,” she said. “But after a few years of paying the bills you regain it, and now I feel I can do it.”

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This month’s makeover

Who: Pamela Walton, 54

Income: $48,000

Assets: $170,000 cash, nearly $30,000 in retirement accounts, home valued at $210,000

Debts: None

Goals: Set up a financial plan, reallocate investments, save for retirement

Recommendations: Preserve the bulk of her remaining nest egg and create a household budget. Until she gets a full-time job, keep insurance proceeds liquid in a money market account. Shift the 403(b) portion of her retirement savings into an individual retirement account so she can reduce fees and have a broader choice of mutual funds. Reallocate the money to include bonds. Contribute to a Roth IRA. Once she gets a job, seek financial advice to reinvest the remaining insurance money into a mix of stocks and bonds.

About the planner: Jennifer Hartman is a fee-only certified financial planner and co-founder of Greenleaf Financial Group in Los Angeles.