If clients are focused on paying unexpectedly high costs for care at the end of their lives, margin or other debt lines can be another tool. Consider, for example, an only child who needs cash flow to support his father’s care needs. It may be useful to utilize a margin line on the son’s taxable investments to create cash for care expenses. Using margin saves the father from paying capital gains taxes on potentially low-basis assets. The father’s estate plan could be revised to incorporate a provision to pay back any margin loan his son incurred, thereby replenishing the son’s asset base. Additional potential tax savings may be realized if the son receives a stepped-up basis on inherited assets upon his father’s death.
Beyond these approaches, we suggest using technology to help quantify and shed light on longevity risk for each specific client. The goal is to provide the advisor and clients with opportunities to ponder how longevity risks could derail an otherwise solid plan. The process is also a way to start a conversation with clients about reviewing their insurance, working longer or adjusting spending budgets as ways to secure their plan in the face of longevity risks.
In the chart, we illustrate potential impacts that longevity-related risks could have on annual and monthly retirement spending budgets. As you’d expect, the impact of a grey divorce creates the greatest reduction in potential annual spending. Consider the effect it could have if a client also takes on a second spouse who has little or no assets. In the case where a couple does not receive an expected $1 million inheritance, their “safe” monthly spending budget would be reduced by an estimated $2,333 each and every month of a 30-year retirement. It’s also significant to note that a person who lived to age 105 would reduce guideline annual spending by $38,000 per year from $228,000 to $190,000. The goal here is not to focus on the precise numbers but rather to display, in directional terms, how much clients may want to reduce current expenditures in order to provide a longevity safety net. To the extent more than one of these events occurs, the financial impacts compound. Running plans for younger clients may introduce even greater variability between the model and actual outcomes since there is a greater likelihood of any given event over time plus less certainty about exactly how much longevity could improve for younger generations.
Conclusion
As advisors, it’s our responsibility to spot trends in the lives of our clients and to develop and provide tools and solutions for managing the numerous risks life can deliver, including longevity risk. We must continue to work together in our industry to identify trends and provide solid, practical solutions for clients and families who depend on our foresight and ability to both protect them from longevity risk and help them build the wealth required to enjoy the longer lives they (and their parents) are likely to live.
Dawn Doebler, MBA, CPA, CFP, CDFA, is a principal and senior wealth advisor at The Colony Group. Michael J. Nathanson, JD, LLM, is chairman and chief executive officer of The Colony Group.