I often tell folks that I got into this field because I love numbers and investing. However, I did not realize I would learn as much about aging. As we help our clients transition through all the stages of their lives, we are on the front lines of seeing folks and families deal with end of life issues. When we sit down with clients we go through their concerns and priorities. The number one concern for a lot of folks is running out of money. Since we focus on retirement income planning and tax management, one of our core jobs is to help clients develop a game plan so that they will have predictable income throughout their lives to meet their cash flow needs.
For many folks as they approach retirement, there is a lot of concern on their budget and rightfully so. However, what most folks find is that once they are in retirement they eventually find a steady state budget that usually does not fluctuate too dramatically. If it does, they often times can pivot and adjust. The number one thing that can wreak havoc on all of this is if a person has a long-term care event where they become frail. This is one of the top things that I worry about.
As we design retirement income plans, the foundation is the guaranteed income that they receive from pensions and Social Security to create what we call their floor. On top of that is additional guaranteed income that raises their floor that they can get from private pensions they create from guaranteed sources like annuities. We have found that the more guaranteed income people have, the happier, more secure, and greater peace of mind they have. After that folks use their portfolios to supplement their income. I call client’s portfolios their golden goose. The more they have in the portfolio, the more passive income can come out just like the golden eggs from the golden goose in Aesop’s fable. We have had clients who have been retired over 20 to 30 years and goal is to draw passive income off their portfolio so that they are living off of interest and not tapping into principal. Generally speaking most folks can sustain over 30 year period anywhere between 3-5% depending on how young they start drawing. Let’s say 4% as example. Therefore, if they have $1 million in their portfolio, they could draw $40K a year if they have moderate allocation so they draw interest their portfolio that replenishes it.
The challenge with a long-term care event is that it is not unrealistic nowadays that the cost of care could be between $5000 to 20,000 a month. Not only is this a huge expense but if we are using the portfolio for passive income and then we start drawing additional principal on top of that, it negatively impacts the income capability of the portfolio. Back to our example, if a couple is drawing $40K off that that $1 million portfolio which is sustainable, if one spouse now has a long-term care event costing $8000 a month or rounding up $100K a year, we can be in trouble. In 2 years, then the portfolio is down to $800K and then distribution rate goes up to 5%. It does not sound like a lot but now we are increasing chances we will start to heavily draw on principal for the regular spending needs.
We have seen this with some clients where one spouse has to cover care for the other and they are worried that they are going to run out of money to even maintain their own lifestyle. Quite candidly, it is heartbreaking.
This is why we believe that with every client embedded in their financial plan, they need to have a long-term care plan. Now we have to balance this because if you thought of the worst case scenario, you would never spend any money. We do not believe that is how to live. However, sometimes folks will tell us I do not care if I leave my kids anything. I tell them story of one of my clients who came in with her son-in-law. He joked with her, “I don’t care whether you leave me anything, just don’t cost me anything.” Seriously, parents do not want to be burden to their kids and kids want mom and dad to have the best care.
There are a lot of alternatives in the plan such as long-term care insurance, life insurance with long-term care riders, use of equity in home, continuing care retirement communities, Medicaid spend down planning, and more.
If you have questions reach out to Melissa Anne and she will coordinate meeting with our financial planners who specialize in holistic financial planning.