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Practice Management

Advisors must be able to speak knowledgeably about what living longer means to clients' everyday lives, how much it will cost, and how to manage the life ahead, not just pay for it.

This Practice Management article is intended for financial advisors only (registered representatives of broker dealers or associated persons of Registered Investment Advisors).
 

Trying to engage your clients in a discussion about their retirement that may be 10 or 20 years away can be more challenging than making derivatives a light lunchtime chat. An Employee Benefits Research Institute study revealed that nearly 50% of clients have not even opened their statement envelopes for more than a year. And an ING Retirement Research Institute survey echoed that lack of client engagement when it reported that 71% of Americans do not have a retirement plan.

While behavioral finance has shown the limited rationality of investors, the real problem lies in the fact that they are more rational in the short term than in the long term. People focus on what is in front of them today—the urgent, immediate, and sometimes novel. And that, of course, is the problem when it comes to retirement planning.

Consumers, especially those 45 to 55 years old, are ruled by a litany of trade-offs today: work, family, a child's soccer practice, community activities, staying fit, and all the little things in the business of life. Caught in the high velocity of things that must be done today, they opt for what they have to do in the next 10–20 minutes rather than what may be necessary for goals two or even three decades in the future.

So, is all lost? Is client engagement an elusive goal for the financial advisor seeking a deeper discussion with clients who do regularly check their portfolios, or even a quick check-in with the 50% who are shelving their statement envelopes? No, all is not lost. Advisors can get on the client's agenda by engaging in a new conversation that is relevant to life today while crucial to a client's financial future. Planning approaches that appeal to a client's future goals are not incorrect, they are just incomplete.

Today's advisor must be able to speak knowledgeably about what living longer means to clients' everyday lives, how much it will cost, and how to manage the life ahead, not just pay for it. Here are three conversations your clients are dying to have with the advisor who can put those ideas into context for them.

Health Meets Wealth
Health and wealth are the bookends of retirement. While good financial planning may provide economic security in older age, health and well-being will predict the quality of life, as well as how expensive longevity will be. Consequently, asking "How's your health?" is as much a financial question as "How much are you saving for retirement?"

Many Americans older than 45 have decided that their retirement plans include extending their work life to save more and spend less. That may be a good and, for some, necessary strategy. However, more than 100 million Americans have one chronic condition—hypertension, perhaps, as just one example. What's more, 60 million people have two or more diseases, and about 20 million have three or more chronic conditions. Chronic disease, particularly multiple conditions, are likely to cut work plans short and result in early retirement or even disability, greatly affecting plans and portfolios.

Numerous studies cite the "average cost" of health care for a couple older than 65. That number has been approximately $230,000–250,000 for several years. Different diseases and multiple conditions can greatly add to those "average" costs. (These are costs that the previous generation largely did not experience, perhaps because of shorter lives.)

A client who is managing diabetes, for example, can anticipate several thousand dollars' worth of additional, annual expenses after insurance. Likewise, the projected impact of obesity on conditions such as heart disease, knee, and related joint disorders, as well as the estimated explosion of Alzheimer's disease, suggests that there will be considerable health-related costs for the next generation of the elderly.

New medications and related health services emerging to meet the demands of multiple chronic diseases in old age are likely to require payment above what insurers are willing to pay—some may remain 100% discretionary out-of-pocket expenses, as nearly all alternative therapies are today.

Health is a financial issue. Most clients already understand this. Client engagement requires a discreet and caring conversation about the real state of a client's or couple's health to be responsive to their individual needs and not just an average cost projection. Empathetic expertise beyond finance is the new and necessary ingredient for effective longevity planning.

Costs of Caring
Few people think about helping a parent or a loved one as "caregiving." They simply see it as part of being a good son, daughter, partner, spouse, or family member.

However, the provision of informal assistance to an elderly loved one can range in intensity from simply calling to say hello to an all-encompassing effort like daily feeding and dressing. According to the Gallup-Healthways Well-being Index (a daily, nationwide survey of 1,000 Americans), nearly one in four families provide some form of caregiving. On average, that adds up to about 21 hours per week. The face of caregiving is most often a spouse, followed closely by the oldest adult daughter or daughter-in-law.

The cost of caring is both physical and financial. The Gallup-Healthways Well-being data indicate that the physical toll of caring for a loved one can be fatigue, pain, and, sometimes, depression. However, the financial costs have real impact on retirement plans.

According to the AARP, about half of caregivers spend discretionary income averaging $200–300 per month, depending on the intensity of care. Moreover, caregiving can impact work life and planned retirement. The AARP and MetLife estimate that there may be more than $30 billion in lost productivity to companies due to caregiving. It also represents lost household income. Declining a promotion that requires leaving the region where an elderly parent lives or having to stop work before planned retirement to provide care all have a real impact on investment portfolios.

For many, caregiving will become too intense for family members. Professional aging services will be necessary to keep a loved one at home or to provide a few hours relief to the caregiver. Depending on the region of the country, as well as the type of care needed, home care can begin at $15 per hour and skyrocket depending on the skills, services, and equipment that may be required.

Today, the average caregiver is a 50-something adult daughter caught between work, children (maybe even grandchildren), as well as one or more sets of elderly parents. She is ready to hear of care solutions that will ensure her well-being in old age, as well as reducing that future burden on her children and loved ones. Consequently, conversations about what she is doing today for a loved one and a comprehensive plan on how to pay and provide services at her time of need will be relevant to her now and provide a basis for engagement about planning for tomorrow.

Choosing to Stay Home
Images of retirement for several decades have included fairways, beaches, and smiling faces in sunny climes. Despite the imagery, and even before the economic downturn, very few couples, fewer than 10%, moved from the home where they lived in their fifties. For most, their home is where they paid a mortgage, built a marriage, and created memories. While there are new communities being built for aging baby boomers, the next generation of retirees does not show a dramatically stronger preference to leave home and, similar to their parents, is choosing to age in place.

There are costs, however, to staying home. Even after a mortgage is paid, the family home may begin to have expenses that include maintenance, modification, as well as services to allow an aging owner to stay.

More than 70% of Americans who are 50 years old and older live in suburban and rural areas. According to the American Housing Survey, the average American home is 35 years old. Routine maintenance can seem costly enough even when there is full-time work and a predictable income. However, as the home ages, the maintenance is likely to become a major cost. Roof repair turns into replacement and so forth. And since there is not a monthly home maintenance bill, most repairs come as a sudden financial shock that can be so expensive that homeowners often delay the work. And that, of course, results in higher costs down the road.

Moreover, as people get older, even a second-floor bedroom can become inaccessible due to stroke, progression of chronic disease, or a disabling accident. Likewise, making a routine meal in a kitchen with high counters and cabinets can become an extreme sport for someone with arthritis and suffering from fatigue.

Modifying a home to add supportive technology or to remodel to improve accessibility is an unintended and often invisible cost of staying home. A basic stairlift, for example, that can provide independence to the user and relief to the caregiver, can cost anywhere from $5,000 to $15,000 to install. Even if the funds are available, access to a trusted provider to provide routine maintenance or install more complex systems remains elusive for even the most informed consumer.

These are only three conversations that address topics that many clients 45 years old and older are facing with their parents, or thinking about, as they find their health becoming more complicated by the diagnosis of one more condition. Health, caregiving, and the passionate desire to remain independent are among the most important and emotional issues that become more important with age because of their impact on a client's life and the lives of people they care about. Longevity planning is the new retirement planning. Successfully engaging clients who are too busy today to think about tomorrow requires a new expertise that includes finance as well as fluency in the issues, costs, and services that support making a longer life a better life.


Joseph F. Coughlin, Ph.D., is the director of the Massachusetts Institute of Technology AgeLab.

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