Feature
Live Long & Prosper
Elizabeth Harris
12/01/2006

When a Philanthropist in her 60s met with her financial advisor, she asked him to calculate how much money she could give away. The woman had given millions to her favorite causes and shared generously with her children, and she assumed she had much more to bestow. But she was shocked to learn that if she continued to distribute $3 million to $4 million each year, she would deplete her capital by the time she reached her early 80s.

"It scared her," recalls Lew Altfest, the woman’s financial advisor and president of L.J. Altfest & Co. in New York. He placed her on a "giving diet," recommending that she scale back her outlays by $1 million per year. "She had longevity in her family—her grandmother lived into her 90s and her mother was in her 80s."

Like Altfest’s client, many individuals in industrialized nations are living longer—and this is reshaping the world of estate planning. In the United States, the length of the average life span nearly doubled in the past century; males born in 2005 are expected to live to an average age of 75 and females to 80, according to Census Bureau projections. Many people will live far longer. If they reach age 65, women enjoy a 44 percent chance of living until 90, while men have a 34 percent chance, according to the Society of Actuaries Annuity 2000 mortality table. The odds for an average couple increase even more. A 65-year-old couple has a 63 percent chance that one of them will live beyond 90. Demographers believe life spans will lengthen even more. Longevity is expected to increase worldwide; some developed nations will see average life spans reach nearly 100 by 2050, according to James Vaupel, a demographer with the Max Planck Institute for Demographic Research in Rostock, Germany.

The trend has enormous financial and lifestyle implications. The well-constructed retirement, wealth management and estate planning strategies of today can be toppled if a principal lives for 10, even five, years longer than expected. Some individuals, such as the aforementioned philanthropist, will be forced to scale back their giving. Others will have to delay their retirement plans in order to maintain annual expenditure goals. Longer life spans also force families to confront thorny questions regarding how to maintain a senior’s independence and how to balance preparations for the often-extraordinary costs of health care with the desire to leave a substantial inheritance.

Complicating these equations is the fact that affluence correlates with longer average life spans. Access to better medical care and healthier lifestyles help extend life, says Andrew Oswald, an economics professor at the University of Warwick in Coventry, England. Oswald calculates that someone living on an annual income of about $130,000 will live an average of five years longer than someone with an income of $45,000. However, many individuals fail to understand how these demographic differences will affect them personally.

TOP VIEW
Advances in medicine and healthier lifestyles have increased life expectancies significantly; actuaries say many people born today could approach the century mark. This is forcing a revolution in estate planning as individuals reconsider whether their fortunes will sustain their chosen lifestyles for more years than anticipated. As wealth managers scramble to recast their clients’ estate plans for the long haul, a new class of professional gerontology advisors is emerging to assist.

"Most of us underestimate our longevity," says Maureen Mohyde, a registered financial gerontologist with The Hartford’s corporate gerontology group. At least 60 percent of Americans surveyed by the Society of Actuaries last summer misunderstood average life spans and lowballed their own life expectancy. These miscalculations carry heavy financial repercussions. Ron Rogé, a financial advisor with RW Rogé & Co. in Bohemia, N.Y., says adding just five years to a principal’s life expectancy requires significantly more assets—he estimates 20 percent more than an existing portfolio—to maintain the same retirement income. For example, if a person initially requires $5 million to fully fund his retirement, extending his life by five years would require an additional $1 million in assets.

"We look for low-probability events that can have catastrophic consequences—running out of money is one of them," says Rogé, who recently began increasing his estimates of his clients’ life expectancy from 95 to 100. He also has reduced the maximum annual withdrawal target of his clients to 3 percent, from the more standard 4 to 5 percent. "People are becoming realistic about it," he says.

Not-So-Great Expectations
Those middle-aged individuals who plan to retire in their 50s or even early 60s are discovering they must scale back their prospects. Most of them do not plan for their nest eggs to sustain them for 40 to 50 years, but demographic trends show that such foresight may become a necessity for a large percentage of the population. If longevity trends continue upward, the potential for underestimating retirement portfolios become even more worrisome. The initial strategy for managing such contingencies is to implement conservative spending plans. Business people accustomed to high-six-figure, or even low-seven-figure salaries, often harbor unrealistic ideas regarding their retirement income: drawing $400,000 each year from a $10 million portfolio, for example, or allotting $250,000 a year for private jet travel might well be impossible, according to Michael Book, a managing partner with Lenox Advisors in New York. "They think they’re so wealthy they can’t screw up, and they can," he says.

One of Book’s clients, an investment banker, sought to retire at age 54 with a net worth of $6 million, drawing a yearly income of $250,000. But Book showed him that by retiring early and drawing so much income, he put himself in danger of running out of funds. The client decided that he had two choices: either living on less than $250,000 annually, or working a few more years. He opted to do both. He plans to continue working until age 60 and now targets a $210,000 annual spending budget for his retirement years.

One of Book's clients sough to retire at age 54 with a net worth of $6 million, drawing a yearly income of $250,000. But Book showed him that by retiring early and drawing so much income, he put himself in danger of running out of funds.
Advisors and their clients are also looking for more creative financial strategies. One approach is to purchase a single-premium annuity, Book says. For example, an individual could take $3 million that, in a diversified portfolio, might generate $120,000 to $150,000 in income per year, and put it instead into an annuity that would produce $250,000 per year. A person who wants to leave an inheritance could use some of the difference in income between the two approaches—say $75,000—to purchase life insurance in an amount equal to his planned bequest.

Nontraditional insurance may also help limit risks to a portfolio. "Wealthy people have always managed risk through insurance," says Jim Phillips, an insurance broker with McGriff, Seibels & Williams in Atlanta. Even those who can afford the best nursing care increasingly perceive the benefits of long-term care insurance, Rogé says. Today the average American stands a greater than even chance that he will one day need such care; annual nursing home costs, calculated by insurer MetLife, continue to escalate, ranging from $65,520 in Denver to $125,944 in New York. Many individuals are purchasing coverage that pays for in-home help, believing it will help them retain their independence. Others see it as a way to remove a financial and emotional burden from their children, and as a more effective use of funds than paying for these services in cash later on. Long-term care insurance could also negate the need to liquidate assets at an inopportune time or in such a way that would trigger capital gains tax.

Many insurers offer policies designed specifically for affluent individuals with ample cash flow. For example, MassMutual offers a $160 daily benefit policy, which a relatively healthy 65-year-old couple can purchase for $12,509 a year. Business owners enjoy a tax advantage for this type of coverage: They can deduct all or part of the premiums they pay for qualified long-term care policies from their corporate taxes, according to Phillips.

Reverse Parenting
Karen Doskow, who lives in Westfield, N.J., worries that her 75-year-old mother, Anne Tofel, lives too far away from her in New York’s Westchester County. Last January, a severe storm left her mother without electricity or heat for five days. Tofel, widowed six years ago, endured, but Doskow worried. That experience prompted Tofel to relocate; she will sell her home and buy another located just an eight-minute drive from Doskow. "Ultimately, you can’t force your parents to move," Doskow says. "They have to come to their decision on their own, and hopefully it will come about before major-crisis mode."

Tofel enjoys good health now, but Doskow, a marketing consultant, believes closer proximity will enable her to provide better oversight. She and her husband, Jeffrey, a cardiologist practicing in Union, N.J., plan to help supervise any future medical care Tofel requires. As a family, they turned to their financial advisor, Matt Sinclair of New England Financial in Tarrytown, N.Y., to help Tofel develop a complete financial plan; he will also supervise the real estate transactions. Today Sinclair finds himself working with a growing number of families to devise plans for aging parents—some of whom are not as affluent as their children. He asks a new question of his middle-age clients to assess their risk: "In the next 15 years, will your parents become your dependents?"

Sources: NASD, organization websites. (Click image to enlarge)

As families ponder this and similar questions, the crowd of experts hiring themselves out to help find answers is expanding—from elder law attorneys to financial gerontologists (see above "Senior Credentials,"). Some of them recommend using a new vehicle designed to streamline decision-making processes as individuals age: a longevity trust. Adriane Berg, an elder law attorney in Morristown, N.J., says that these documents spell out when an aging individual will delegate control of issues, from health care decisions to financial planning and others. The five documents include:

• A power of attorney to transfer financial decision-making if the principal becomes mentally incapacitated.

• A health care power of attorney, complete with medical instructions to follow if the principal becomes physically incapacitated.

• A Health Information Portability and Accountability Act (HIPAA) authorization, giving the bearer rights to access medical records.

• A health care proxy that covers situations the health care power of attorney does not, and gives the bearer rights to make decisions.

• A gifting power of attorney that empowers a proxy to make gifts to your fiduciary.

Berg recently drafted a longevity trust for an 82-year-old woman experiencing the beginning stages of Alzheimer’s. Together, Berg’s client and her three children selected one of the siblings as the family fiduciary advisor. Berg also recommends that her clients clearly specify and enunciate where they want to live if they have Alzheimer’s, and make as many decisions as possible, while still in command of their faculties. "People tend to spend a lot of time working on their wills, but all of these documents that have to do with money are skimpy," Berg says. "They don’t take into account: ‘What do I want my life to be like?’ "

These questions have a particular urgency for Harriet Reininger and her husband, Arthur, who together owned Edwards Luggage, a high-end retail operation in the San Francisco area. She is 78 and Arthur is 91; her father lived to be 101. The Reiningers cared for him in their home for 12 years, and eventually hired assistants when he needed them. But that situation became untenable when he began to believe that his caretakers were spying on him. This forced Harriet to locate an assisted living facility better equipped to care for him—but her father could not participate as fully in the decision-making process.

Last year, as Harriet and Arthur pondered their ages, they realized that maintaining their home in Palo Alto, Calif., was becoming increasingly difficult. The gardening was becoming more of a chore than a joy for Arthur, a World War II veteran decorated with four Bronze Stars for service in the Pacific. Although they are both still active and healthy, they decided to sell their house and move into a luxury retirement center nearby. The Reiningers wanted to choose where they would live, and did not want to burden their three children with that decision or their care should they require it in the future. "In a sense, it was an insurance policy that there would be a facility if we needed it," she says. "It wasn’t that we needed to move into a retirement center, but when you get to a certain age, you really have to start thinking about it."

Illustration by Jonathan Barkat.

Elizabeth Harris is a staff writer for Worth.

Additional Information
Measuring the Mortal Coil