(Journal of Accountancy, By Lea Hart; Published October 2016)
As the 4 million people retiring this year think about the future, they fear outliving their money more than anything else.
Forty-one percent of CPA financial planners say running out of money is their clients’ top concern about retirement—including those clients who have a high net worth, according to a survey conducted recently by the AICPA.
“The elderly are living longer than their projected longevity and, as a result, are running out of money,” said Susan Tillery, CPA/PFS, chair of the AICPA’s PFS Credential Committee. “The fear of running out of money in retirement has always been present. However, we are at a demographic crossroads where the Baby Boomers, who hold the largest amount of retirement assets, are supporting both their parents and their children. This has amplified the fear.”
The AICPA PFP Trends Survey, an online survey of CPAs who are members of the AICPA Personal Financial Planning Section, also showed that 29% of planners say clients’ top concern is maintaining their current lifestyle and spending level, while 11% say their clients worry most about rising health care costs.
Personal financial planners can address their clients’ fears of outliving their savings by running a number of models “to determine the lowest rate of return at the least amount of risk needed to achieve the client’s goals,” said Tillery, who is also president and co-founder of Paraklete Financial Inc. Members of her practice, she said, run five models for each client, which helps instill confidence in the process and the results. She also recommends projecting models out to age 100 to give clients a better picture of what their finances might look like if they live for a very long time.
Though clients worry most about money early in retirement, after 10 or more years of retirement, health becomes their area of greatest concern. Forty-four percent of financial planners say that serious illness, including dementia and diminished capacity, is their clients’ top concern after 10 or more years of retirement. Twenty-eight percent said their clients’ No. 1 fear later in retirement was experiencing a sharp decline in the value of their investments, while 19% said clients were most concerned about moving out of their home to live in assisted care.
Compared to last year’s PFP Trends Survey, Tillery said, this year’s survey reveals “an increased awareness of diminished capacity and rising health care costs.”
Though clients have grown more concerned about cognitive decline, most aren’t planning for the possibility that they might experience diminished mental capacity in retirement. Just 18% of financial planners say clients are proactive about the issue, while over one-third (35%) say clients are thinking about it but haven’t decided on a course of action.
Members of the PFP Executive Committee have developed a Diminished Mental Capacity Checklist to help financial planners discuss the issue with clients. The committee’s recommendations for financial planners include:
- Assessing who within the client’s circle of relatives, friends, and professionals would take action if needed, and set the necessary authorizations for each to talk to the other.
- Reviewing clients’ estate planning documents.
- Taking steps to mitigate the risk of elder abuse.
- Discussing housing options with the client.
In addition, Tillery and Jean-Luc Bourdon, CPA/PFS, a member of the AICPA’s PFP Executive Committee, offer several suggestions as to how financial planners can best address clients’ concerns about diminished capacity:
Don’t assume anything. When it comes to dementia and diminished capacity, it’s important to ask questions, offer resources, and inform clients, said Bourdon, who is also a principal of BrightPath Wealth Planning LLC. It’s important not to assume that clients aren’t concerned or affected, or that someone else will address the issue with them. What’s more, don’t assume clients know what to do, or that a financial planner’s advice would be inappropriate or unwelcome to them, he said.
Address diminished capacity through proper estate planning. Ensure that clients have established the necessary powers of attorney, HIPAA and health care directives, and that they have a plan in place for cognitive care, Tillery said. Advisers should also discuss the possibility of implementing a trust-based estate plan with clients, which she believes is “necessary to properly address dementia and incapacity issues.”
Be proactive. Too often, Bourdon said, advisers and families only take steps to assist a person with diminished capacity “once the problem has become painfully obvious.” He stated, “Developing a protective structure around older clients should be done well before the blows come.” While having that conversation may be difficult, he said, the long-term benefits are worth the temporary discomfort. One tactic advisers can try, he said, is to explain that they have seen these life scenarios unfold in the past, and ask clients’ permission to assess what might be most helpful to them and their family.