their situation might look like when one of them dies or becomes incapacitated.
An early dose of reality can help you build a financial foundation for the
surviving spouse.
Two weeks ago, my neighbor died unexpectedly at the age of 76. Three weeks
after beginning to feel sick, he was dead of lymphoma. Judging by his widow’s
reaction, I am pretty sure they never contemplated this scenario. I am not close
enough to my neighbor to pry into her financial affairs, but I am guessing that
she will have to carry on with one less Social Security check and a small
investment portfolio that she may or may not know how to manage.
I don’t know if he had life insurance. If he did, she should be able to
maintain her current lifestyle, which includes living in a nice house, playing
golf several times a week, and traveling to see their kids several times a year.
If he didn’t, she may end up having to sell the house, curtail some of her
activities, and pinch pennies to pay the bills.
Further musings about my neighbor’s situation cause me to wonder how the rest
of her life will play out. How much longer will she live? Will she remain in
good health, or will she acquire some debilitating chronic condition? At what
point will she become one of the frail elderly—generally healthy but too weak to
take care of herself? And how will she afford the care she needs as she moves
through the natural phases of aging?
Helping clients imagine possible scenarios
Scenario planning is fun when you’re planning vacations, but not so enjoyable
when it involves contemplating life’s worst events. Helping a woman imagine the
death of her husband of 57 years and then finding the strength and financial
resources to carry on for up to 25 more years seems like too brutal an exercise
to put clients through. But if thinking about it for a minute would help her
prepare for such an eventuality, the pain of imagining the worst-case scenario
can be replaced by relief that the necessary insurance policies and investment
plans are in place to preserve her financial security should the scenario play
out.
To keep scenario planning from smacking of old-style, hard-sell insurance
sales practices, do it within the context of the client’s overall life plan.
What do they see for themselves in the years ahead? How do they want their lives
to play out? What do they want to accomplish? How do they want to live?
Then…what if something goes wrong? Can they imagine themselves getting old? Can
they imagine themselves acquiring a debilitating disease? Can they imagine
themselves becoming widowed? Can they imagine themselves dying?
The current trend in retirement planning is to focus on the positive. Clients
dream of all the trips and leisure activities that await them in retirement
while you put an investment portfolio in place to fund the eagerly anticipated
lifestyle. Nobody wants to think about how those dreams might be shattered by
illness or an untimely death.
But it is exactly this type of scenario planning that advisors do best. By
gently taking clients’ minds to those dark places, you make it safe for them to
contemplate scenarios they may never consider on their own. Then you propose
solutions that recast those scenarios in a less terrible light. My widowed
neighbor never would have wanted to contemplate her husband’s death at age 76.
But if she had, and if she knew that she would be OK financially, losing her
husband might still be devastating emotionally, but at least she would be less
fearful about the future.
The phases of aging
Following are the phases that naturally tend to play out after age 65. Not
all clients will go through each phase. But scenario planning can help them
mitigate the damage in case they do. Notice that health expectancy is at least
as important as life expectancy.
- Healthy and active. Clients in this phase are able to do
pretty much anything they want, save mountain climbing or hard physical labor.
Everyone would like to stay in this phase as long as possible, whether it’s to
work a little longer to fund a more comfortable retirement, or to start crossing
items off their bucket list after they retire. Anyone who wants to prolong this
phase should be exercising, eating right, not smoking, and getting regular
screenings, as failure to engage in these proven health-preserving activities
might throw them into the next phase. Scenario planning for a long healthy and
active phase involves making sure there is adequate income to allow clients to
do all the things they want to do. - Limitation of activity caused by a chronic condition. Common
diseases that some people live with for varying lengths of time include heart
disease, cancer, diabetes, arthritis, osteoporosis, hypertension, and more. Not
all clients will enter this phase, but scenario planning should provide for
their possibility. Clients who are working may have to stop, or at least cut
back, which could cause an unexpected drop in income. Clients who are forced to
curtail travel and leisure activities may actually save money on that end only
to pay it out to doctors and hospitals at the other end in the form of
deductibles and co-payments. Scenario planning for this phase involves making
sure there is sufficient health insurance and adequate funds set aside for
out-of-pocket medical costs. - Limitation of activity caused by aging and general frailty.
My neighbor died before entering this phase, but his widow may not. If she’s
like many older women, she will remain relatively healthy for many more years
but face natural muscle loss or cognitive declines as she ages. The curse of a
long life is the gradual erosion of capabilities, from opening jars to simply
getting around the house. Everyone knows someone in this phase, so it’s not such
a stretch to imagine it for ourselves. Scenario planning involves the
consideration of some form of assisted living, along with long-term care
insurance or a plan for self-funding the associated expenses. - Death. This is the end of the line, and it could come at any
time. Some clients, like my neighbor, may enter this phase unexpectedly early.
Others will live well past the average life expectancy.
Scenario planning involves looking at death in two ways: (1) the effect on
survivors if it occurs early, and (2) the financial resources necessary to fund
an extraordinarily long life if it comes late, also called longevity planning.
For couples, the most devastating scenario is when the husband dies early and
the wife lives on with limited resources. This can be mitigated by life
insurance on him and long-term care insurance for her, along with guaranteed
lifetime income from Social Security and commercial annuities.
For those who still have a choice, the high earner should delay claiming
Social Security benefits until age 70 in order to maximize the survivor’s Social
Security income. Annuitization of a portion of available assets can supplement
Social Security and provide a base income.
What are the odds?
Each client is an individual, of course, but statistics can help clients
determine the odds of something happening to them.
Life expectancy
Life expectancies continue to rise. From 1900 through 1902, life expectancy
at age 65 was 12 years; by 2005, life expectancy for this age group had
increased to 18.7 years. Keep in mind that when you are looking at average life
expectancies, half of all people will die sooner, and half will live longer.
Scenario planning should incorporate both possibilities.
| Average Life Expectancy in Years | ||
| Current age | Men | Women |
| 50 | 28.8 | 32.5 |
| 55 | 24.7 | 28.0 |
| 60 | 20.7 | 23.8 |
| 65 | 17.0 | 19.7 |
| 70 | 13.6 | 15.9 |
| 75 | 10.5 | 12.3 |
| 80 | 7.8 | 9.3 |
| 85 | 5.7 | 6.8 |
| 90 | 4.1 | 4.8 |
| 95 | 2.9 | 3.3 |
| 100 | 2.0 | 2.3 |
Chronic conditions and general frailty
The frequency of debilitating chronic conditions rises with age. Among
non-institutionalized people, 25% of those age 65-74, 42% of those over 75, and
60% of those over 85 report being limited in their activities by some kind of
chronic condition. Arthritis and other musculoskeletal conditions were the most
frequently mentioned chronic conditions, followed by heart and circulatory
conditions.
| Prevalence of Chronic Conditions (Number of persons with limitation of activity caused by selected chronic health conditions per 1,000 population) |
|||
| Chronic Health Condition | Age 65-74 | Age 75-84 | Age 85 and older |
| Senility or dementia | 9 | 30 | 77 |
| Lung | 33 | 49 | 42 |
| Diabetes | 39 | 46 | 45 |
| Vision | 18 | 36 | 88 |
| Hearing | 10 | 24 | 78 |
| Heart or other circulatory 93 145 211 | 93 | 145 | 211 |
| Arthritis or other musculoskeletal | 120 | 172 | 272 |
The perception of aging in this country has turned positive, thanks in part
to television ads showing happy, dancing couples with silver hair and nary a
line on their faces. It’s safe to assume that we all want to live a long and
healthy life. But helping clients imagine less-ideal scenarios—perhaps through
real stories like my neighbor’s and pointing to statistics that help them assess
their odds—can provide the dose of reality they need to put the necessary
arrangements in place. Then they can turn their attention in a more positive
direction.
References and further reading
“Health
Characteristics of Adults Aged 55 Years and Over: United States, 2004-2007,”
Centers for Disease Control and Prevention
“The State of Aging and
Health in America, 2007,” Centers for Disease Control and Prevention
“Life-Cycle
Spending After Retirement and Adequacy of Economic Preparation for
Retirement,” Retirement Security Project
“Health
Expectancy,” Society of Actuaries
