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Barron’s Guide to a Healthy, Wealthy, and Wiser Retirement

Enjoying your health and wealth in retirement takes more work than you might think. Our pros look beyond the numbers. What about the kids?

By Beverly Goodman            

 
When you ask someone if they’re enjoying retirement, you rarely get an answer that includes the 4% rule or an asset-allocation plan. Sure, the numbers that get you to, and through, retirement are important, but money is just the beginning. A good retirement plan also needs to take into account many other issues, including where you want to live, how you want to spend your time, and how to communicate your financial plans to your children.

Health, housing, and family are subjects many people ignore when planning for retirement. Not our panel of experts. We convened four top financial advisors from around the nation to share their thoughts on helping clients ensure that their health and wealth last for a good long time.
Mary Deatherage is a financial advisor with Morgan Stanley in New Jersey. Ann Marie Etergino is with RBC Wealth Management in Chevy Chase, Md. Two panelists happen to be based in Minneapolis—Judy Fredrickson, with UBS’ Private Wealth Management group, and Ross Levin, at Accredited Investors Wealth Management, which he co-founded in 1987.

Talk quickly turned from housing to health care to the kids, and how best to manage a family’s financial expectations. Here’s what our pros had to say.

Clockwise, from top left: Ann Marie Etergino, RBC; Ross Levin, Accredited Investors; Mary Deatherage, Morgan Stanley; and Judy Fredrickson, UBS. Jenna Bascom for Barron's

 
Barron’s: What are the initial topics you discuss when meeting with new clients?
 
Ann Marie Etergino: We ask what’s keeping them up at night. That elicits a different answer than asking about their goals or why they wanted to see you. We had a long meeting with a client recently and went through all the numbers. Then I asked what was keeping her up at night. She said her health; she didn’t know which child would help her if she got sick. How basic is that? It didn’t matter that she had $30 million. She was worried about who would take care of her.
 
Judy Fredrickson: You get wide-ranging responses to that question, and most often they aren’t related to money.
 
Ross Levin: It is important to get both people in a couple talking. One is usually dominant. After he or she talks, we turn to the other and ask, “How does that square with what you’re thinking?” The dominant person doesn’t think they are controlling, but they are.
 
Mary Deatherage: Never interpret silence as not having an opinion. Sometimes you need to talk to people separately; take the less dominant person to breakfast or lunch.
 
Levin: Every money conversation is about something else: power, security, fear.
 
How do you create a spending plan that addresses those concerns?
 
Deatherage: We want to maximize the retirement experience in the early years, front-loading travel expenses and the things people have always wanted to do, because later they might not have that luxury.
 
Fredrickson: We run several scenarios. The first is that you live to 85, needing little care. Then, we look at what could happen if you need a lot of care. Would your spouse stay in your home while you’re in a long-term care facility? Can you afford both? We encourage clients to keep the money necessary to ride through a worst-case scenario.
 
Etergino: We always assume clients are going to live to 95 or 100. They’re often astonished. Affluent Americans live longer than average—43% will live to be at least 95; nationwide, just 19% will do so.

The richer you are, the more you need to plan for longevity. So we talk a lot about the risks—what could go wrong. Most people say, “Oh, my grandmother had a heart attack and died in her sleep, so that’s what is going to happen to me.” But people today are more likely to develop a chronic disease, which can have high costs.

How do you plan for health-care costs?
 
Etergino: We always have a separate line for health-care costs. If the client is a young person still working, we cover what are they paying out of pocket—their co-payment, their deductible—so they are conscious of what they’re spending. As they get older we discuss what their Medicare out-of-pocket costs are going to be.
 
It is important to break it out, because health costs escalate at a much greater rate than anything else, by 6% to 7% a year. If you aren’t accounting for that, it could derail your retirement plan.
 
Deatherage: People also don’t realize that when you’re 65, you have to sign up for Medicare, even if you’re still working.
 
Etergino: If you don’t sign up, you are penalized; you’ll pay a higher premium.
 
Deatherage: The older a person gets, the more complex their medical life becomes. It isn’t uncommon to go into a home and see a dining-room table completely filled with medical bills. There are more and more organizations recognizing this is all too complex.
 
What sorts of organizations can help manage health care?
 
Deatherage: We work with PinnacleCare. They’ll help our clients find a doctor, make sure their prescription plans aren’t duplicated, choose the right hospital, get a second opinion right away. They work with everyone, from newborns to seniors. They charge an annual fee. There are also smaller organizations that charge by the hour that can help you work through some of these complexities. It is such a relief for the family to have an advocate.

Ross Levin, Accredited Investors Wealth Management: “Every money conversation is about something else: power, security, fear.” Jenna Bascom for Barron's

 
Levin: We also encourage our clients to work with a health-care concierge of some sort. And we like health savings accounts, or HSAs. It’s the only savings vehicle that lets you get a deduction on money you put in—$3,350 a year for singles, $6,750 for families, plus another $1,000 if you’re 55 or older—and still withdraw it tax-free, so long as you use it for health-care expenses.

It goes along with a high-deductible health-care plan, so it’s best for people who can afford to pay for their health care from other funds while working. They can let the HSA grow until retirement.

How does long-term care insurance factor into your plans?

Fredrickson: I talk about long-term care with all my clients. The average age someone goes into a nursing home is 80, with a typical stay of three years. That could be something like $700,000.
An extremely wealthy person can afford that. But for people for whom that would be a big hit, we usually recommend the Lincoln MoneyGuard product. You fund it upfront, paying a lump sum, and get approximately four times that amount later in long-term care coverage.

Why do you like the lump-sum insurance policies? Not many people feel good about taking $150,000 or so out of their portfolio all at once.

Fredrickson: Companies that charge annual premiums don’t guarantee those rates, and have been raising them. So somebody could be paying $6,000 a year and get a notice that it is now $9,000 a year. With the MoneyGuard product, you pay once and you’re done. For example, if a 55-year-old woman pays $100,000 for a policy, it would immediately provide about $400,000 in long-term care benefits. And, when she dies, her heirs would receive a death benefit. She could also cancel the policy at any time, and get most, if not all, of her premium back.

How can people estimate how much long-term care insurance to buy?
Deatherage: Find out what the cost of nursing care is in your area. Remember that to claim the insurance, you need to be disabled—even if temporarily—to the extent that you are unable to perform a few activities of daily living, such as eating, bathing, and dressing.

Etergino: We like the lump-sum refundable policies, too, but we usually advise people to buy enough to cover about half their expected long-term care expenses.

Levin: It is an emotional decision. Some people need permission to not handle all the caregiving themselves, and long-term care insurance does that. One of our clients is a doctor married to a nurse. They decided to buy a long-term care policy so she wouldn’t feel guilty about hiring the help she might need to take care of him, even though financially they didn’t need it.

How do you decide which spouse gets the policy?

Levin: We prefer shared-care policies, paying annually so it’s not a big hit. In that case, you buy about six years’ worth of coverage that either or both people can use. We like the idea of not having premiums go up, so we usually do a quick-pay option. Instead of paying annual premiums indefinitely, you pay them over 10 or 15 years. Even if the premiums increase, there’s a point at which the policy is fully paid up.

Does that cost more?

Levin: Yes, in the short term. For example, a 55-year-old would pay about $5,000 annually for a policy that gets them $6,000 a month in coverage. They could end up paying that for 30 years, if they don’t need care, until they’re 85. If you pay it in 10 years, it’ll be $9,500 annually.

Deatherage: Insurance companies have dramatically underestimated how much long-term-care costs would rise, and how much longer people could live. It used to be that a person got to be 83 years old, needed long-term care, then lived another three years. But now they could live to 100. If they’ve got the opportunity, you’re going to be paying their catch-up costs.

What are other situations might prompt people to buy long-term care insurance?

Fredrickson: I have a client whose second husband was seven years older than she. She had children from her first marriage and owned a successful family business, but lost half her wealth in a divorce. We asked if her second husband were to get sick, did she want to risk her children’s inheritance on his care? She said absolutely not. They bought a policy that would cover about 40% of expenses his care could incur.

Did she buy a policy for herself?

Fredrickson: Yes. It’s not just for nursing-home care. Even younger people could use it if they have a bad bike accident or fall that has them laid up for six months. She makes quite a bit of money, and if she was unable to work for a while, it could cost the family a lot.

Ann Marie Etergino of RBC advises people to buy long-term care insurance to cover half their expected expenses. She likes lump-sum policies. Jenna Bascom for Barron's
 
           
Etergino: We suggest sometimes that clients buy long-term care insurance for their parents. If our clients are in their 40s or 50s, and their parents are in their 70s and not able to pay for their own long-term care, it can make sense.
 
Deatherage: I’ll sometimes tell a client, even if he or she is one of four kids, to consider buying long-term care insurance for their parents. If you know you’re going to be the one responsible when your parents get ill, don’t even ask the siblings to pay for the premiums. It’s in your own best interest to buy your parents’ coverage.
 
What is the downside to buying long-term care insurance?
 
Deatherage: The insurance industry wants us to think that we are all going to need some level of long-term care. Neither of my parents did, and neither of my husbands did. That’s why a reimbursable policy makes more sense. But I like the idea of having a fund set aside for long-term care, because the older our clients get, the more irrational they are about money. They always worry they’re going to get “thrown out” of a place.
 
Etergino: In some cases, long-term care didn’t make sense for our clients, but life insurance did.

Parents want to leave money to their kids. They can buy a $1 million second-to-die policy, which pays out when the second half of a couple dies, and doesn’t cost all that much if both parents are healthy.

Now the parents can live the way they want to, spend their assets down to zero if necessary, and still have peace of mind that their kids will have a tax-free inheritance.
 
Housing is another big issue for retirees.
 
Fredrickson: People often forget that 30 years of retirement will encompass a few phases; it’s not just about saving to pay for a nursing home. You might not be able to do the same amount of home maintenance you’re used to. At some point, driving can become harder. Even cooking can be problematic; a lot of studies show that people who live alone and don’t have an active social life often suffer poor nutrition. Money can—and should—help with this. It will keep you healthier and happier at home longer. Some clients are resistant to hiring somebody to do the things they feel they should be doing, like cooking and cleaning. But when you are 80, you’ve earned a break.

Mary Deatherage of Morgan Stanley extols the advantages of continuing care retirement communities. Jenna Bascom for Barron's

 
Deatherage: One of the more creative ideas developed in recent years is that of a continuing-care retirement community, or CCRC. People move into these communities by choice. That leads to a different dynamic among the people who live there, because they tend to look forward to their senior years and want to share them with others in the same demographic.

People have their own apartment or small cottage and keep their car, but go to the dining room every night for dinner or happy hour. There are activities and trips people take together.

CCRCs are a continuum, so eventually you may need assisted living, but your friends, who are also neighbors, will come and see you. They offer nursing-home care, as well.

At what age should people move to a CCRC?
 
Deatherage: Typically, people move in their 70s or 80s.

Levin: It’s important for clients to research their housing options while they are healthy and before they are forced to make them. Plus, there are often long waiting lists—sometimes years long. Do your research, so when you’re ready to move. you don’t have regrets. The biggest regret we’ve seen was people moving too late, so they weren’t able to form any kind of community. They felt isolated, and not in control of their decision.

Fredrickson: Location is really important. In Minnesota we have a lot of clients who want to change their residency to Florida to save on taxes.

People in Minnesota move to Florida for tax reasons?

Fredrickson: Well, the weather is a factor, too. But in either case, they’re often sorry they’ve moved so far—especially if they become ill and need care. Visiting with grandkids becomes much harder. Distance can be a strain on retirees and their families.

Etergino: We have a group of clients—all about 65 to 75—who bought condominiums in the same building. They are creating their own community.

Deatherage: It’s the Big Chill every weekend. I like the community-based programs, as well.

I’m affiliated with an organization called Partners for Health Foundation, but there are a lot of governmental agencies and nonprofits and school kids that need to do community-service projects. It is important to the richness and breadth of a community that seniors don’t feel like they have to move out. Every town knows every child; they usually have their own education plan. But they don’t know who the seniors are, whether they’re active or homebound, living alone or with spouses, if there are chronic conditions that the family can help with or if more help is needed. We spend so much time evaluating our children but we don’t spend enough time on the seniors in our communities.

What can be done about that?

Deatherage: We did a survey in our town, asking seniors about their two biggest priorities. The first was transportation—some sit for hours at the grocery store or doctor’s office waiting for a ride. The second-biggest need? Employment. They want a reason to wake up in the morning; they want to think that somebody will notice if they don’t show up. A community that gets it will make that happen. Mobilize the kids. Stay-at-home moms can adopt a grandmother. Take these people grocery shopping when you go, invite them for holiday dinners. You start to define the culture of the town by how important your seniors are. In my town, Montclair, N.J., an organization called Lifelong Montclair helps a diverse group of seniors.

Levin: Earning money also has a side benefit. If someone can make $10,000 year in retirement, that’s like having another $200,000 or $250,000 in your portfolio.

How’s that?

Levin: If you’re using a 4% spending policy, $10,000 is equivalent to withdrawing 4% from a $250,000 portfolio; it’s 5% of $200,000.
 
Judy Fredrickson, UBS: “The biggest factor that will impact whether you are going to be all right in retirement is your spending.” Jenna Bascom for Barron's
 
 
Deatherage: It is often a shock to people how much they need to have invested to generate income. They think, “I have a million dollars,” but if we say you probably shouldn’t spend more than 3% or 4%, that only gets them $30,000 a year. Their cost to wake up in the morning is $150,000. You need $10 million to get $400,000, and that’s pretax.

Do you all use a version of the 4% rule?

Levin: We use a dynamic spend policy, which changes as people age. It also encourages spending in the early years of retirement. The traditional 4% is a worst-case scenario. You have to ask yourself if that should be your driver, or do you want more flexibility.

Etergino: We show different scenarios. People spend a lot more in the early years as they travel and do more, but then spending tends to level off. It takes people about two years to figure out what are they are going to need in retirement.

Fredrickson: Most people don’t track their spending while working. The biggest factor that will impact whether you are going to be all right in retirement is your spending.

Etergino: We encourage clients to use Quicken to track all their spending, preferably starting a year or two before retirement. Everyone needs an idea of what they are spending. Then we can separate discretionary spending from nondiscretionary. That makes people feel better, knowing they have a plan for their fixed costs, plus a discretionary budget, even if it’s variable.

Deatherage: Our portfolio reports show how much of a client’s cash flow comes from dividends and interest. If it’s 2%, people draw the conclusion that they must live within those means. But if you are retired, you are allowed to touch some of the growth that happens.

Levin: My most difficult clients are those who spent too much and those who spent too little. Money has control over them in ways that isn’t healthy.

What spending mistakes do people make?

Etergino: Giving to adult children. Other than health care, that’s the biggest retirement killer.

We see a lot of ongoing support to adult children, and I’m not talking about cellphone bills.

D.C. is an expensive community, so parents often give kids a down payment for a home, or pay for private school or summer camp for their grandkids. If they feel they have to be equal in their giving, that can be significant, even more so when the kids come to expect a gift every year.

Deatherage: We see that a lot, too. The kids will call to ask when “their” money is coming this year, or solicit us to lobby for something: “I don’t think my parents would want John to go to anything but the best private school. What can you do to help with that?”

Levin: Most people don’t want their kids to have to take care of them, yet parents make decisions that jeopardize their own security in order to take care of their kids. Clients will say, “I don’t need to fund my retirement plan this year; I really want to pay for my kids’ schooling.” But those decisions could have huge ramifications down the road.

Etergino: We have family meetings, where we bring the kids in to understand the big picture, the impact of the gifting. We’ve had to say, “If you keep asking for this every year, there might not be enough for your father at the end of his life. Is that what you want?”  

Do parents generally know they’re risking their future on these gifts?

Levin: Some clients see it as giving kids their inheritance early. Their logic is that, if we live to 95, our kids are going to be 70 when they get this money, and that doesn’t do them any good.

But often the ones who are overspending don’t have a great relationship with their children.

Sometimes their money is giving them access to grandkids. They may not identify it as such, but there is some motivation behind sacrificing their own security for their kids. There is some deal or agreement that’s been made and not stated. We go over this all the time in our family meetings, and make sure the kids understand the financial situation of their parents.

How often do you suggest people have financial family meetings?
 
Levin: Sometimes once is enough. We just had a family meeting to talk about the cabin that the kids are going to inherit, but we knew they didn’t want it. The parents gave permission for the kids to sell the cabin when they die. That was a huge relief for the kids, who thought their parents wanted them to keep it.

Etergino: Parents often start out thinking a gift is a one-time event, but the kids come to expect it, and the parents feel guilty stopping.

Deatherage: I had a client who died at 103, and her daughter is also a client. The daughter’s son, 53, calls me one day and says, “Let me get this straight. My grandmother just died and I get nothing?” I said yes, that’s usually how it goes; it goes to your mother first. He said, angrily, “My grandmother died at 103; my mom may live until she is 110.” The kids lobbying you to get the parents to pay even more usually haven’t taken care of their own financial security.

Those sound like difficult conversations.

Levin: Especially when the giving plan isn’t communicated well. We had a client who took care of her father. She was financially well off. When her father died, he left more money to her brother, who wasn’t very involved in his care but wasn’t financially well off. The father was trying to be equitable but not equal, but he never communicated that with the daughter. It was hurtful, but raw emotions can create an opportunity for discussion.

Deatherage: We’ve engaged psychologists to talk to our families. When things get raw, it is always about the money—sometimes it’s a tool, sometimes a weapon. A family meeting with your wealth advisor, insurance agent, accountant, and estate planner is pretty dry. But when you integrate a wealth psychologist, suddenly you have plans to put into action. We’ve done it for cases of early-onset Alzheimer’s, or negotiating prenups.

Etergino: One extremely wealthy client has a daughter with a substance-abuse problem. He has been giving her more money for her care, but the other children are resentful. So what happens after he dies?
 
Conversations about who gets what level of support are important to have.

Fredrickson: One of our clients is a dad with four daughters. One has severe health issues, and he stated to his children, “If I have to spend every last dime to keep her healthy and alive, I’ll spend it, even if that means the rest of you get nothing.” They all agreed, but most important, they all heard it from him. He then stated that his second-biggest priority was funding education, after that he would treat everyone equally. The biggest gift you can give your kids is having your affairs in order—your will, medical directives, an estate plan, and being clear about your wishes. Choose someone to act on your behalf, and document everything.

Keep your passwords in one place that’s easy for your family to find. Make sure someone knows where all your assets are. Even leave a letter distributing family belongings.

Thanks, everyone. 


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