One of the challenges we face when working with high-net-worth clients is their belief that they can self-insure their long-term care needs. We have to skillfully convince them that a health problem during retirement can easily double the monthly income they need.
As part of the financial planning process for all of our clients, we take a close look at what retirement looks like for them. Let’s imagine a couple getting close to retirement. The husband is 55, and the wife is 51. They would like to retire in 10 years, and they will need $12,000 per month (after tax) to cover their income needs. They have accumulated $3 million in various retirement and nonretirement accounts. Let’s further imagine they will have $5 million total when they get to retirement, based on the amount they plan to save between now and then, and assuming they are able to obtain a conservative 6% rate of return on their investments.
When we see this scenario play out for our clients, it is often the case that they are on track to retire at $12,000 per month in today’s dollars, after tax and adjusted for inflation.
We show them graphically what retirement looks like using our financial planning software (NaviPlan). The graph we show them has three colors: Green represents their income sources, such as Social Security, pension payments and annuity payments. Yellow represents liquidations from the various accounts they have available for retirement. Red represents a shortage.
We show clients what they can do today to strategically reduce or eliminate the red category at retirement. Now, the foundation is set perfectly for extended-care planning.
We tell them: “This is what the picture looks like if you are both healthy and you continue to save each year into your retirement accounts. The biggest challenge our most successful clients face is rising healthcare costs and increased life expectancy can conspire, making what was once a financially secure retirement something less stable than that.”
Changing the picture
The next step in this process is to take the very same retirement graph from the top of the retirement analysis we just looked at and put it at the top of a page with two graphs. In other words, this is a smaller version of what they just saw. We then say, “Now we are changing the picture by assuming one of you needs extended care at age 80.”
We then show them a graph of what happens if either of them needs long-term care at $10,000 to $12,000 per month (based on the costs where your client lives). The point here is they will still need the $12,000 per month to cover the living expenses they needed for a healthy retirement. Now, they will need almost the same amount to pay for care.
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The graph shows, almost every time, that some red needs to be addressed. This shows our clients the impact of these costs in a way that is specific to their own individual plan. This gets them to see a clear picture of why it is important to have extended-care coverage.
This also illustrates a conceptual conversation and underscores the point that long-term care costs can be quite disruptive to the retirement planning efforts of even the most wealthy.
Our clients tell us they appreciate having a plan in place that allows them to access funds in a tax-free way to pay for the costs of care they don’t plan on ever needing. This allows them to use their assets in other ways now, knowing the assets won’t be used to cover the costs of care.
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