retirement planning
Estate Planning

Planning Ahead for Longer Lifespans

(Source: Barrons): Abbt Schultz – For decades, wealth advisors would encourage investors to shift their mix of portfolio assets to more conservative investments as retirement neared. But no more.

While the final days of an individual’s financial life used to be when they hit their 60s or 70s, today, “that’s kind of the entry point,” says Leslie Voth, president and CEO of Pitcairn, a multi-family office provider.

“A generation ago it would have been unthinkable to have a 90-year-old client still making decisions and still managing the family’s wealth,” Voth says. “Today we have multiple clients where that’s the case.”

People are simply living longer, well into their 80s and 90s. In an upcoming report for clients, Pitcairn points to data indicating “a quarter of 65-year-olds will live past age 90, and one in 10 will live past age 95.”

The problem is wealthy individuals aren’t preparing to live longer. Instead of figuring out how to pay for healthcare or to preserve financial assets to cover day-to-day needs years into the future, they look more narrowly at questions like estate planning and tax efficiency

Unprepared for Aging

A 2017 survey of high-net-worth and ultra-high-net-worth clients by U.S. Trust found “about half of high-net-worth investors overall don’t feel well-prepared for the financial implications of increasing longevity,” with 70% unprepared for a family member’s “unexpected debilitating or degenerative health issue,” and 67% unprepared for the long-term care of aging parents. Also, 64% said they don’t have the “time or resources to provide care and attention to aging parents.”

For Jim Marion, U.S. Trust’s national fiduciary executive, getting clients to focus on planning for the future has always been “like pulling teeth.” Most of the private wealth manager’s clients “have sufficient assets to sustain themselves regardless of what will happen, both in terms of physical and mental decline,” Marion says. But the “fear of the unknown” has people frozen, he says.

Once people reach their late 50s or early 60s, they are likely to live into their mid-80s or beyond—a “long period of time, but it’s an absolutely manageable period to plan for and model out,” Marion says. “Once you do that the fear of the unknown melts away for people.”

Creating a Family Forum

One of the biggest fears clients have centers on cognitive decline, and the need to put plans in place for managing the family’s investments or the business should the head of a family experience dementia. The Alzheimer’s Association reports that one in three seniors dies with Alzheimer’s or another form of dementia, Pitcairn says, meaning this is a very real scenario for many families.

Pitcairn recently worked with a family who didn’t know what to do when the patriarch, who was in his 90s, continued to make private investments for the family’s partnership, conducting the research on these investments on his own. The patriarch’s children were concerned whether their father was capable of properly evaluating these investments. This upcoming generation formed a committee to study the situation and make recommendations to the senior generation, Voth says.

Getting the senior generation to shift their approach was hard. “It took a few years,” Voth says. “That’s why you need to broach these issues sooner.”

In its upcoming paper, Pitcairn recommends clients create a family forum to discuss potential legal situations well before they happen. Legal documents, such as medical and financial powers of attorney, will create a framework for handling the unexpected. “When it’s time to make difficult decisions, everyone knows where they stand and what role they should play,” the report says.

Given the legal murkiness around what is “competence”—with even doctors disagreeing on a definition—wealthy families would be smart to be clear about what should happen in the case of cognitive decline. The fact that many families have failed to do this kind of planning is already creating a “significant” rise in “litigation and family hostility,” says Patricia Annino, a partner in Rimon’s trust and estate group in Boston. “The question of longevity and competence is, I believe, the issue of the future.’

One way to prepare is by making sure your investments continue to grow by continuing to invest in stocks as well as higher returning, less liquid investments like private equity, according to Pitcairn. A 60-year-old couple today, with 40 more years to live, should have a portfolio invested 55% in global stocks, 15% in hedge funds and private equities, 20% in bonds and 10% in real assets, like real estate. Just 15 years ago, Pitcairn would have recommended a portfolio with fewer international stocks, fewer real assets and more bonds.

As Marion at U.S. Trust points out, for someone who is 70, and who could easily live another 15 or 20 years, staying fully invested in stocks is a reasonable strategy. After all, he says, “you have a couple of market cycles ahead of you.”