“Age is an issue of mind over matter. If you don't mind, it doesn't matter.” - Mark Twain
Financial planners and advisors have always had a bit of difficulty in talking to clients about how to plan most effectively for their future lifestyle funding. This piece includes statistics that should catalyze actions by you (and your clients), and provides a framework for discussion – leading to a simplified solution to a tough issue.
Note the following important situational statistics –
- As indicated in the chart below 1 , mortality ages have extended in the last forty years by 9.1 and 6.4 years for men and women respectively in the US.
According to a 2016 study by Genworth 2 , average annual cost in the US (note rates vary extensively by state) are approximately $46,000 and $44,000. The annual rate of growth in these two categories is roughly 2%. Nursing home care is roughly twice that cost.
Medical insurance costs are clearly increasing compared to earlier years.
The consequence is that not only are we living longer, the costs for maintaining our lifestyles are continuing to increase substantially. Plus, while less than half of our population are considered to be “at risk”, according to the Employee Benefit Research Institute 3 ,
“Looking only at those situations where shortfalls are projected shows that the values for Early Boomers vary from $71,299 (per individual) for married households, increasing to $93,576 for single males and $104,821 for single females."
It is clear that as advisors, we need to take a more aggressive approach to ensure our clients are financially prepared for funding their long-term needs.
One of the difficulties we have all faced is how to be more effective at communicating the issues and thus catalyzing actions that get at solving the problem. An effective and streamlined approach has been developed by Moshe Milevsky 4 of the Schulich School of Business, York University, Toronto, Canada. In the referenced piece, he suggests we retire the idea of talking about the probability of ruin, and refocus conversations on the following action steps:
- Make a preliminary calculation of how long your client’s money will last (in years). He provides calculations for the longevity of a $1.0 million portfolio in terms of years as follows (Note: in the referenced article, he provides the formula you can use to adjust the numbers to the specific holdings of your client and assumed rates of return consistent with your portfolio recommendations):
On the basis of your client’s expected lifetime, portfolio size, and annual spending, the simple question is, “is it likely you will outlive your money?” If so – or perhaps just cutting it too close, you’ll need to take some action – the question is how much and in what ways. This simple, data-backed approach gives a clear rationale and direction for starting this conversation.
For those clients who are clearly more adept at statistical formulations, you can always head into a deeper dive for tackling more substantially the randomness of the variables, and perhaps do additional (monte carlo?) analysis for sensitivity factors. Additionally, given the above statistics of increasing longevity and potentially higher costs of care, adding some cushion to the financial support plans is clearly a prudent step.
Additionally, identifying and factoring in the personality traits of your clients provides more traction. For example, in using the MarketPsych Insights profile system,
For clients who score high on plan orientation, fleshing out the details of your calculations, the implications, and identifying solid action steps clearly would mesh with their perspective. For low scorers, you would need to convey implications in more simple terms and follow up more frequently for reminders and ensuring actions are indeed implemented.
For clients who score high on financial anxiety measures, use more conservative calculations that provide ample cushions in planning for the future…and perhaps point to higher proportions of liquidity available to ensure low risk of failure as well as pre-setting action plans and consider longevity insurance policies. For low scorers, less frequent reviews and simpler versions would be adequate.
As always, if you have a difficult client situation that we can help you take action to resolve - by generating potential catalysts for communications and ideas aimed at enhancing relationship trust - please let us know by email.
FYI - we are also adding a new feature soon to our website for subscribers to make it more convenient to schedule personalized support with select specific challenging client situations.
Mark Harbour, CFA, CPA, CIMA®
: Information taken from Infoplease - http://www.infoplease.com/ipa/A0005148.html
: see the link available at - https://www.genworth.com/about-us/industry-expertise/cost-of-care.html
: see the link available at - https://www.ebri.org/pdf/briefspdf/EBRI_IB_410_Feb15_RSShrtfls.pdf
: see the link available at - http://www.cfapubs.org/doi/pdf/10.2469/faj.v72.n2.4comments powered by Disqus