Will your clients have enough money if they live to 100? If you are a wealth advisor who is not modeling that possibility, then you aren’t planning conservatively enough. The number of Americans aged 100 or older has risen 44 percent since 2000, and these centenarians are also living longer, according to federal health officials.
In fact, the percentage of Americans living past 90 has grown dramatically over the last four decades, and children born today will live longer than any previous generation.
When I’m building financial plans, I assume my clients will live to be 95-100. Some chuckle at that optimistic estimate, others remark that they don’t think they’ll live that long. But it’s my job to plan conservatively.
Here are four steps you should be taking to plan for your clients’ longevity.
1. Determine your clients’ goals for their wealth. Financial planning means different things to different people. Those at the beginning of their careers are focused on things like their children’s education or buying a home. They’re beginning to save for retirement and want to make sure they can maintain their lifestyle when they retire.
At the other end of the wealth spectrum are those who are no longer concerned about funding their lifestyle. They’re more focused on the legacy they’ll leave to family or philanthropic gifts.
Financial planners should help their clients identify and prioritize goals for their wealth. With those priorities in mind, I design a customized strategy to put the client in the best possible position to achieve his or her goals. I gather information about their assets and spending and marry these knowns with the unknowns.
Among the unknowns are how long the person will live and market performance. Nobody knows exactly what the market will do in the near or long term, but technology can simulate how very good, bad and average markets will play out over 30, 40, 50 years. I always start by identifying a way to achieve the client’s “must-haves” at a 90 percent-plus level of confidence, giving them the comfort of knowing they’ll be just fine, even if they experience bad markets.
2. Plan for health care and long-term-care expenses. The chances that a client will need long-term nursing care grow as they age, and health-care costs are rising faster than inflation. But it’s difficult to plan for these expenses. You don’t know when, or whether, a client will need them, nor how long they’ll need them.
The U.S. Department of Health and Human Services estimates that someone turning age 65 today has an almost 70 percent chance of needing some type of long-term care in their remaining years.
I worked for a client couple who wanted to assume they would each need long-term care in the future. I discovered that the average stay in a long-term nursing facility was three years. To be conservative, I doubled that assumption to six years. I added the cost of 24-hour care and increased it by 6 percent a year, and together we estimated that they’d need it from ages 86-92. Then we backed in to how much they’d need to set aside today in order to fund that goal.
That’s what conservative, goals-based planning looks like, and it gave them tremendous comfort.
3. Run the numbers. Clients are often reticent to plan, sometimes assuming (incorrectly) that they can rely on rules of thumb to make their financial decisions. There is no one rule that applies to the specific goals my clients are trying to achieve. Generic saving or spending assumptions will get you only so far. For clients saving for retirement, we can calculate the specific wealth level they need to acquire to have the retirement they want.
However, the planning doesn’t stop once a client reaches a certain wealth level. I’ve had wealth advisors tell me: “My client has $100 million, they don’t need to do planning.” On that, I push back hard.
Yes, maybe that client has enough to take care of his or her needs. But after funding their lifestyle, what do they have left over? How much do they have to work with when it comes to wealth transfer or philanthropy, so they don’t give too much away? How much can they allocate to less-liquid alternative investments without endangering the money for their core needs up to age 95-100? A financial plan will illuminate that.
The numbers required to plan conservatively can be jarring—and they often spur clients to action.
4. Set a plan. Monitor. Adjust if needed. A financial plan is an ongoing conversation. I don’t set a plan and come back 30 years later to see if it worked. Actual portfolio performance should be tracked over time so clients can see how they’re doing relative to their goals. A wealth advisor should revisit the plan as often as needed, but typically I make changes only as new goals arise or if there is a meaningful change in our assumptions. Any change in investment strategy should be weighed against how it fits in with the overall plan.
With the technology available today, it is much easier to track my clients’ progress toward their goals. I can even set alerts so that I know immediately if their probability of success drops below a certain level. The plan is a living document, and I contact them if something needs attention.
A common fear clients at all wealth levels share is not having their money when they need it. They also fear having to rely on their children to support them when they get old. The way to avoid that is to do deep, comprehensive, planning as early as possible to make sure clients are positioning themselves in the best way possible.
My advice is to plan conservatively—and live to 100.
Matt Teich, CFA, CFP, is the director of financial planning for Cresset Wealth Advisors.