Are High-Net Worth Clients Planning to Pay for Their Aging Parents?
We at AgingInvestor.com met with some forward thinking business owners, all under age 40, expressing their concerns about their aging parents. They weren’t sure what should be set aside or what to plan for their loved ones. Any of these business owners could be your HNW clients.
Some had purchased long-term care insurance for a parent and we were happy to see that good planning. Others figured they’d have to pay out of pocket when the need arose.
The gap between what older people think and expect and what really happens as we age is startling. And it is likely to throw the burden of paying for it on the financially successful adult children of these elders in denial. Some of their parents never had much wealth. Others have depleted their assets by outliving them or by other factors.
What about the dollars and cents? The Genworth Cost of Care Survey is done every year and provides average rates charged by service providers for homemaker services, home health aides, adult day health, assisted living and nursing home care across the country. And you can also search by state to see the average where a client’s parents live. Even the lowest level of care, someone to come in and help with cooking, shopping, laundry and errands averages $19 per hour, the national median hourly rate. The national median monthly rate for assisted living is $3500. And in my state, in urban areas and well-populated centers, it is twice that.
If your clients must consider paying for long-term help for their aging loved ones, it’s planning you need to do with them. It’s a special fund or targeted assets to be used for aging parents as needed.
Educate yourself first. Figure out how much it may take. According to a colleague who knows long term care insurance benefits, the average time a person with this kind of insurance collects policy benefits is three years or less. If it’s three years at $43,200 a year for assisted living, not factoring in the 2% annual increase in cost, that’s $129,600. And that’s under the unlikely scenario that a person who lives into her 90s, say, is going to stay level in what she needs over that three years. More likely than not, her needs will increase and the facility will charge more every month for more services. We see clients who are shelling out over $10,000 a month for a parent to be in assisted living. When parent is infirm and needs a lot of things from the staff, every new thing increases the monthly cost. A few years of that kind of expense can take its toll on your client’s retirement planning.
Near the end of our fruitful discussion, one of the participants asked, “What do the other 99% in our society do when an aging parent needs long-term care?” The answer: they either provide the care themselves at a very high personal cost, or their parent spends what assets he has until they’re gone. Then he ends up on Medicaid in a shared little room in a nursing home. No one wants to see that happen if you can help it.
Here are the takeaways to share with your HNW clients who may end up supporting aging parents or paying for their care.
- Look ahead. Discuss what needs your client’s family, particularly elders may have and what may be required from your client to meet potential obligations created by their family members.
- Consider whether your client should buy long-term care insurance for parents if their parents are not wealthy and have health issues. Do this before their parents turn 60 if you can. The elders may become uninsurable or premium cost may become prohibitive later.
- Educate your client about the real costs of long-term care. If they’re under 40 as our audience was, they are probably not thinking about their potential future obligations to parents who are not financially successful. This was an unusual group.
Smart planning now can save your client shock and distress later. If they are responsible folks, help them to expect the long run as their parents age. People in the 85+ age group are the fastest growing segment of our population. Most of these elders are not wealthy and someone will need to care for them.
What's an Investor to Do When History Doesn't Repeat Itself?
We’re in an era of extremes. It seems a day doesn’t go by without the word “historical” popping up in the financial news.
The equities market and consumer debt are at historical highs. Interest rates and high-yield credit spreads are at historical lows. We haven’t seen even a 5% pull-back in the market this year—for the first time since 1995—and the DJIA is exhibiting its narrowest trading range in history. These are indeed historical times. And whether this fact has you filled with extreme optimism or extreme pessimism, you have some important decisions to make going forward.
There are theories about how we landed in this particular era of extremes, and most are rooted in the significant changes that have impacted both how we live and how we invest. At the top of the list are globalization, automation, and the largest aging population in history (yet another “historical” to add to the list). It’s said that the most dangerous words in investing are, “it’s different this time,” yet one has to wonder if, in fact, it really is different this time. Not just because of the historical market highs. After all, there always has been and always will be a new market high waiting around the corner. What’s different today is the sheer number and confluence of these extreme highs and lows—and their duration. It’s a situation no investor has experienced before, which can make these waters feel pretty daunting. History repeats itself, and investment strategies are largely built on that conviction. But what do we do when it doesn’t? When history fails to repeat itself, how can investors plan for tomorrow with confidence that they are positioned to protect their assets and gain a reasonable level of yield?
The first step is to recognize that, at least in many ways, the investment landscape really is different this time around. All you have to do is look at the numbers to be sure of that fact. And the catalysts I mentioned before—globalization, automation, and the aging population—aren’t going anywhere. If anything, the impact of each will only grow as time moves on. What that means is that there’s no way to predict what’s coming next. The only thing we know for certain is that predictability is a thing of the past (if it ever really existed at all). The result: you need to approach your portfolio differently than you ever have before.
Your goal, of course, is to find return given a risk tolerance. Current yield is an important part of total return and getting it is an elusive proposition in today’s market. If, like many people, you’re less than confident that the four major sectors that currently drive the equities market—healthcare, discretionary, tech, and financial—are poised to continue to rise at even close to recent rates, it may be wise to seek out alternatives to help drive yield without adding more risk to the equation.
But if alternatives are the wise path forward, which alternatives are the best options?
Real Estate Investment Trusts (REITs), Business Development Companies (BDCs), and energy stocks, traditionally the favored “non-correlated alternatives,” defied expectations when the stock market crashed in 2008, inconveniently revealing high correlations just as the equities market began its freefall. Anyone who was invested in these alternatives at the time knows all too well the devastating impact “non-correlated investments” can have on a portfolio, especially when they fail to do their job when it matters most.
Luckily, there is one alternative that can be counted on to remain uncorrelated to the traditional financial markets and, ultimately, deliver that precious yield: life insurance-based investments. And because this asset is literally built on one of the irreversible catalysts of change, the aging Baby Boomer population, owning life insurance may in fact be the ideal alternative to help investors generate non-correlated returns, regardless of where the market turns next. Even better, these investments typically deliver those returns with very low volatility.
What makes life insurance different is that, unlike typical alternative vehicles, secondary life insurance returns aren’t based on the economy. Instead, they are inherently non-correlated because returns are based solely on the longevity of the individual insureds.
As much as we would all love for the bull market to continue on its merry way, one thing history does tell us even today is that a bear market will come. It’s only a matter of when. As you strive to hedge your portfolios and prepare for the inevitable, life insurance-based investments are one tool that can help you achieve the three things you need most: diversification, low volatility, and yield.
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