A comprehensive approach to analyzing your client's long-term care costs - Part Three

If you haven't read the first two parts of this blog, please do so before reading this final installment.


How do you know if you have properly prepared your client for the contingency of future long-term care costs? 

The best way to answer this is to answer the more general, more important question:  Is your client satisfied with the chances that your retirement goals will be reached (including the all-important goal of not outliving your assets), taking into account his/her range of future costs of long-term care? 

To answer this question, it is necessary to combine the desired goals, with the range of costs of long-term care and with the following strategies and balance sheet items:

1. Spending strategy.  What is your client's planned spending for living expenses, vacations, new cars, etc.?  Include medical costs and prescription drug costs (Jack P Paul Actuary, LLC can assist in planning for these two items).
2. Investment strategy.  This includes, but isn't limited to the composition of the client's initial investment portfolio, the anticipated reinvestment/disinvestment of cash flows, the mix of qualified vs. non-qualified assets, and rebalancing strategies.
3. Insurance strategies.  Should there be a purchase of long-term care insurance?  Perhaps an annuity with a long-term care rider?  What about prescription drug plans?  Longevity annuities?  (Again, Jack P Paul Actuary, LLC can assist in determining appropriate insurance strategies).
4. Long-term care Plan of care strategy.  This was discussed in Part One of this blog.
5. Tax strategies.  When to take certain income, deductions, capital gains/losses are active decisions that should be incorporated into this analysis.  Other tax strategies are embedded in the investment strategy, such as when to use qualified vs. non-qualified assets and the tax implications of using one mutual fund vs another.
6. Existing and Future income.  Including earned income and income not included in the investment strategy.  This often includes decisions as to when to start taking Social Security Income.  (Again, Jack P Paul Actuary, LLC can assist in determining the optimum time/age to receive social security income).
7. Existing and future liabilities.  This includes credit card balances, house and car payments and other items.  Care should be taken to determine the time when balances become due and payable (for example, upon a death).
8. Estate and legacy strategies.  This includes leaving money in the will as a goal of the client.

These are all incorporated into programs which perform Monte Carlo testing on the investment rates, mortality and morbidity rates (morbidity includes health care, long-term care, and prescription drug rates of use) and which incorporate the above eight items, to calculate the probabilities that the client will meet his/her goals. 

After these probabilities are computed, iterations are performed and the programs rerun, to determine a set of realistic, achievable strategies that arrive at an acceptably high probability of success of the client goals.  Most often, the most important strategy is the spending strategy, in terms of affecting the probabilities and in terms of the client's future lifestyle.  There is often a tradeoff between the amount of money that the client would like to have available to live on, and the chances of meeting his/her goals. 

In summary, future long-term care costs are an important consideration for those nearing or at retirement.  The methodology presented in this three-part series allows these costs to be planned for in a comprehensive, analytical way, customized to the client.

SPECIAL OFFER FROM JACK P PAUL ACTUARY, LLC

For a limited time, Jack P Paul Actuary, LLC will work with you to produce a comprehensive analysis of a client at 30% off the regular price.
Please contact Jack P Paul Actuary, LLC for details!

This article copyright by Jack P Paul Actuary, LLC 2012