Pitcairn Update, June 2018
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June 8, 2018 – Individuals reaching retirement age are living longer than ever before. In the United States, the average person who reaches age 65 is expected to live for nearly two more decades, according to the Social Security Administration. Today, a quarter of 65-year-olds will live past age 90, and one in 10 will live past age 95. Affluent individuals, with better education, living conditions, and access to medical care, are experiencing even greater increases in life expectancy, according to the National Bureau for Economic Research study “How the Growing Gap in Life Expectancy May Affect Retirement Benefits and Reforms.”
This increased longevity has considerable benefits for individuals and their families. Living longer offers individuals time to do the things they love – a chance to spend more time with family and friends, seek out new experiences, travel more, and watch children, grandchildren, and perhaps even great-grandchildren grow up and reach new life stages.
But living longer is also creating new challenges. Those with substantial assets who wish to pass wealth on to subsequent generations are finding it more difficult to effectively plan to ensure they and their families can maintain their lifestyles. The elder generation needs to make sure they have enough money to support themselves as they age. In order to do so, they must strike a delicate balance between satisfying their ongoing personal needs and quality of life expectations, while also considering the effect on their family’s future. Maintaining this balance for an uncertain number of years can strain family relationships, especially as younger generations see inheritances and succession plans delayed, often until they themselves are at or near retirement age.
Traditionally, managing wealth in preparation for the later stages of life is centered on estate planning and tax efficiency. As people live longer, this narrow focus is inadequate. Without consideration given to life expectancy and the continued preservation and growth of financial assets, an individual may simply run out of money if they live to age 90, 95, or 100. That makes most estate planning efforts moot.
Successfully navigating a long life is ultimately about more than just making sure the money doesn’t run out. Longevity and the complications that come with it can often reveal deeply personal issues that can threaten to put tremendous stress on family relationships. That’s why effectively charting a course for life after retirement means looking closely at and planning across four specific areas of impact: health care, legal management, family, and financial management.
Each of these areas needs to be factored into a comprehensive approach to managing longevity and wealth. This requires continuous communication and planning to achieve sustained family success.
For most individuals, health care spending steadily increases with age. A 66-year-old uses half the Medicare spending of an 80-year-old, according to the Kaiser Foundation. About 44 percent of men and 58 percent of women over 65 will require nursing home care, according to the Center for Retirement Research at Boston College. Despite considerably more resources, wealthy Americans are no better prepared to deal with the realities of long-term care than everyone else. According to a 2017 US Trust survey, more than half of high net worth and ultra high net worth individuals are unprepared for the financial implications of needing long-term care for themselves or for their spouses.
Research from Genworth shows the current median cost for a private room in a nursing home is $91,000 per year. Wealthy families may pay considerably more than that, and the number does not account for any additional medical treatment or care. As more diseases change from fatal diagnoses to chronic conditions, the cost of ongoing care will only increase. The Health Care Cost Institute reports a retiree with a chronic condition will face at least twice the health care costs of someone without one. Throw in the fact that many wealthy individuals in these situations want the most advanced care and you have a recipe for a significant drain on a family’s wealth.
The toll that the failing health of a family member takes is hardly limited to finances. The unfortunate reality is that these situations can be a source of emotional strain as well. Losing a family member is difficult psychologically, and it can completely transform lifelong personal relationships. The Coalition to Transform Advanced Care found that caretakers of sick parents commonly report feelings of stress, resentment, guilt, and sadness. Similarly, the sick individual is likely to experience feelings of depression, anxiety, and isolation. These strong emotions can often impact conversations related to financial management. That is why interpersonal issues must be managed as carefully as the financial aspects of long-term care.
Estimating the cost and impact of health care is inherently difficult, but frequent and realistic planning is important in preparing for inevitably rising medical costs. A detailed look at current health and family history can provide insight into likely health care challenges in the future. Working closely with a health advisory firm offers families a proactive approach to appropriately manage health care expenses, such as understanding the risks, developing a personalized plan, identifying leading caregivers, and coordinating preventive services and treatment.
Establishing and communicating a plan for ongoing health care has an intrinsic legal component. Living wills and end-of-life protocols can be complicated by increased longevity. Living longer creates new risks in the decision-making ability of wealth creators and older individuals. One in three seniors dies with Alzheimer’s or another form of dementia, according to the Alzheimer’s Association. There are 5.7 million Americans living with Alzheimer’s today, and by 2050 that number is expected to increase to 14 million. Unfortunately, individuals who have lost some of their faculties may still be in a legal position to make personal and professional decisions that could wreak havoc on continued family and personal financial success.
Families can benefit considerably by creating a plan for these situations long before they actually arise. Family Office Exchange recently identified increased longevity as one of three leading trends that family wealth owners and their advisors will need to contend with in the years to come. FOX recommends heading off legal complications by creating a family forum to discuss these potential situations before they arise. Identifying issues before a crisis can create improved opportunities for better outcomes.
Even with proactive planning, creating a legal framework for overseeing estate planning and new issues created by increased longevity is essential. Medical and financial powers of attorney add an established process as individuals lose their ability to make decisions in the best interest of the family’s ongoing prosperity. When it’s time to make difficult decisions, everyone knows where they stand and what role they should play.
These are not easy conversations to have. In many cases, family leaders have spent their lives building their wealth and a legacy. It’s easy to see why ceding control to other family members or outside advisors is a challenge. In these difficult situations, communication is the most valuable tool in a family’s toolbox. Retiring family leaders should clearly communicate their wishes and expectations long before longevity issues arise. This includes providing a detailed overview of the family’s legal framework and what role family members will play. Often, trusted advisors can play a key role in facilitating these conversations and steer a family toward a productive, positive dialogue.
Most parents dream of providing a better life for their children. There are few things they prioritize ahead of passing on wealth to subsequent generations. But providing a certain level of comfort can also create new expectations.
Children incorporate wealth they think they may inherit into their own financial plans. In some cases, children begin to expect access to assets or resent their parents, and it can create family friction. Longevity can exacerbate this friction. Parents must plan for living longer and the increased costs associated with longevity while considering their role in helping their children achieve their goals.
In managing family dynamics and longevity planning, the importance of communication cannot be overstated. Family leaders must make their plans and intentions known, and younger generations must be free to express their own expectations. This comes down to good governance practices and a family structure that facilitates open dialogue and honest interactions. As the parents get older, many families shift planning and perspectives to incorporate younger generations to a greater degree.
Tackling the financial aspects of longevity challenges requires constant vigilance and support from the right partners. Spending often increases as the demand for medical care rises. This unknown expense makes forecasting financial needs and legacy planning even more difficult.
As recently as two decades ago, most financial plans for retirement planned for only 10 to 15 years of additional assets. While planning has improved, it has not kept up with the rapid increase in life expectancy that now sees many individuals living well into their 90s. While protecting wealth later in life is important, the notion that individuals should automatically begin reducing risk as they get into their sixties may be shifting. With 30 to 40 more years of life ahead, they may be more apt to take a more aggressive approach in order to ensure they maintain wealth into their later years.
Financial planning and accounting for longevity must begin long before retirement and be continuously updated. Individuals should adjust their strategies and plan for changes at marked transitions, from official retirement from the family business to the move to an assisted living facility or the death of a spouse. Ultimately, creating a plan around these steps is part of an effective succession plan. Only a few things are certain in life. Preparing and planning for them is the best way to ensure a family’s ongoing success.
Successful longevity planning requires a specific look at issues like estimating health care costs and legal structures, but it also is best served by taking a step back and looking at the combined family and financial impact of family leaders living longer. With the right preparation and discussion, often facilitated by a trusted advisor, an effective plan can be put in place. This planning and communication must be continuously updated to remain effective beyond retirement and into an individual’s golden years.
Longevity planning extends beyond the family. Many families have trustees and advisors in place that could face similar longevity challenges. Make sure to include discussions with these trusted partners and put a succession plan in place.