People are living longer, in part because of medical advances. But that doesn't mean Americans are not getting sick. In fact, as diseases become more manageable, people are faced with new dilemmas. Can they stay in their homes and still receive the care they need? If not, what type of facility is best-suited for the type of care they require? To illustrate some of the issues involved, InvestmentNews
created a hypothetical family and asked financial planners David Morganstern and Susan M. Steel to review their situation and make recommendations.
The Jones family: -John, 82, and Jenny, 81, live in the Midwest. They have two children, Jenna, 49, a widow who lives nearby with her son, Jonathan, 18. James, 47, is married and has two children, Jack, 16, and Josie, 12. They live on the West Coast.
Income: -The Joneses retired when John, a former human resources director, was 63 and Jenny, a former accountant, was 62. They started taking their Social Security benefits right away. Both have pensions. Their annual income from Social Security, pensions and savings is about $65,000.
Major assets: -The Joneses live in a two-story, four-bedroom single-family home that they have owned for 40 years. The house is paid off and is valued at about $475,000, down from a peak of $575,000 three years ago. They also have a vacation home on a nearby lake, also paid off, that is valued at about $300,000, down from $400,000 a few years ago. When they retired, they had a nest egg of $500,000, which is now about $250,000.
Major liabilities: -None. Their biggest single bill is their property taxes, about $7,000 a year.
Investments: -John's brother was an insurance agent/financial adviser. When the Joneses retired, he helped them set up a retirement portfolio in which their savings were invested in a diversified portfolio of mutual funds. He has since passed away and John has taken over the investment chores through a large, national discount broker. Their nest egg is still in mutual funds: 30% domestic equities (large, mid- and small cap), 10% international equities, 40% bonds (Treasuries and corporate) and 20% in a money market account.
Challenges: Until they reached their 80s, the Joneses had an active retirement. They took at least two major trips a year and spent summers at their vacation home. They were active volunteers in their community. They also helped out their daughter after her husband died in a car accident, watching their grandson through his teenage years while Jenna was at work. Now that he is getting ready to go to college, the Joneses plan to pay $10,000 a year of his college costs.
But things are changing. Jenny has emphysema and is having trouble climbing the stairs of their home. John has been diagnosed with Alzheimer's, though it is still considered to be in the early stages. Jenna is close to her parents and is willing to take care of them, but she still works and is a single mother. She has taken her parents to visit a nearby assisted-living community and believes they should move soon, before her father gets too much worse. Her parents would like to stay in their home, but also realize it may be more practical to move to an assisted-living community. However, they aren't in a rush.
Jenna is also concerned about whether her father still is able to take care of her parents' investment portfolio. She has noticed some financial statements piling up on his desk, unopened.
Jenna doesn't know much about how assisted-living communities work, how much they typically cost and even whether her parents could afford living in one. She's hoping the proceeds from the sale of her parents' house would be enough to get them into such a facility. She would like to hold on to the vacation home if she can because it has been in the family for three generations and her parents often said they would like it to stay in the family once they're gone. Her brother wants to help out, but he lives on the West Coast and gets back to visit only once or twice a year.
The bottom line is that Jenna needs help getting her parents situated in a new setting and squared away financially — for their security and her peace of mind.
RECOMMENDATIONS: DAVID MORGANSTERN
Family meeting. The entire Jones family should meet with a fee-only financial planner to come to an agreeable course of action about the continued care of John and Jenny. This will include a discussion about managing their progressive health needs, cash flow, investment allocation, asset liquidation and estate preservation. John will need to accept that it is time for someone else to manage their investments.
Since Jenna lives nearby and is willing to help, she should be appointed her parents' medical health care representative and hold durable power of attorney for them, under the guidance of an estate-planning attorney. Jenna should request duplicate copies of all financial statements for John and Jenny's accounts. Advanced medical directives also need to be completed and signed by the parents, with copies going to their primary physician and the local hospital. James should be kept informed and asked for his recommendations, but the day-to-day oversight for their parents will rest with Jenna.
Emphysema and Alzheimer's disease are long-lasting and progressively debilitating illnesses. Since John and Jenny do not have long-term-care insurance, they will have to develop a plan to self-fund their LTC needs.
Real estate. A priority is to move John and Jenny into an assisted-living facility as soon as possible. Once they are out of the house, it should be readied for sale by doing minor cosmetic fix-ups to maximize the potential price. If it sells for fair market value, they will net approximately $445,000 after real estate commissions and shared closing costs. James could manage the home repairs and sale, leaving his sister and parents to concentrate on their move and health concerns.
Estate planning. Their financial planner and an estate-planning attorney should review all wills and other estate documents. If wills do not exist or appear outdated, they should be redone immediately while both John and Jenny have the mental capacity. A discussion of John and Jenny's wishes for an inheritance for their children and grandchildren is important. If they want parity for all, Jenna's time spent as a caregiver and support system should be allocated a value and considered part of the inheritance.
Assisted living. It is assumed that the cost of an assisted-living facility in the Midwest will average $5,000 to $6,000 per month. As their caretaking needs grow more acute, their expenses will increase. It is reasonable that they could live in a care facility for five to seven years or longer with Alzheimer's and emphysema, which are not immediately life-threatening.
Income. The Joneses live well within their present income of $65,000 from pensions, savings and Social Security. However, even if they stop traveling, their living expenses will rise. Their combined income from all sources will be approximately $72,000, which meets their living expenses now, but as long-term-care and medical needs become more expensive, they will need to draw down their investment principal. Additional income could be generated if the family cabin were rented occasionally, with the goal of meeting its upkeep and property tax costs. This would help defer additional portfolio withdrawals, and if rented enough, this could also supply some continued support for Jonathan's college costs.
The portfolio.The Joneses' investment asset allocation of 40% stocks and 60% bonds is too aggressive and should be shifted toward income and capital preservation. Their combined portfolio of $695,000 (investments and home sale proceeds), conservatively invested, will produce a 3% yield (after management fees), offering an additional $21,000 of income. We recommend a 20% equity and 80% fixed-income portfolio with most of the equities invested in high-quality, high-dividend-paying, U.S. large-value mutual funds and some REITs. A small portion of the equities should be invested internationally in large companies in developed countries. The fixed income should include six months of cash needs, high-quality short- and intermediate-term corporate and municipal bond funds, and a small percentage in high-yield and international fixed-income instruments. With prudent money management and careful cost control, their portfolio could last their lifetimes, depending upon the cost of care and how long they live.
While the family cabin is in-tended to be an heirloom, all parties need to understand and agree that it might have to be a source of funds for John and Jenny's caretaking. If Jenna and James do not wish to sell the cabin but need extra money to care for their parents, they could take out a mortgage in order to keep this family treasure.
David Morganstern is co-president of CMC Advisers. LLC
RECOMMENDATIONS: SUSAN M. STEEL
Family meeting. The Jones family clearly agrees that collaborative change is needed. The family is at a perfect point to establish goals, time frames and division of responsibilities. The family meeting should identify and categorize issues such as evaluation of assisted-living communities, estate planning, investment management, education funding for Jonathan, the vacation home decision, tax planning and preparation, and daily bill paying.
With current technology, James can be as involved as Jenna through phone meetings and video conferencing. The distance might lead to giving James responsibilities for those things that that can be handled by telephone and computer.
Since Jenny's emphysema is not a cognitive impairment and John's Alzheimer's is still in the early stages, both can be involved in family meetings. John and Jenny most likely will feel better about the changes taking place when involved in the decisions.
Create a team. After the family goals, time frames and responsibilities are decided, it's time to establish a team that includes the following people:
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A geriatric-care manager. This person could assess whether John is a good candidate for a continuing-care retirement community — an assisted-living facility that offers extended care for Alzheimer's patients and eliminates the need to move twice. In addition, these managers are familiar with the specialties of facilities in the area and could address the pros, cons and costs of all choices.
Since there is no long-term-care insurance, the family needs to determine whether John and Jenny's net worth is sufficient to support the upfront and monthly costs.
The manager likely would charge an hourly or flat fee for a health care plan or basic research to determine appropriate steps for the Jones family. After the initial review, generally an in-home assessment, the geriatric-care manager could continue to be as involved as the family wants or needs.
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An estate-planning, or elder-care, attorney. The Joneses need to assure their wishes are stated clearly and that their children are legally empowered to help with various activities. They may need some or all of the following documents from an attorney: a power of attorney providing authority that is recognized by financial institutions, a health care power of attorney and living wills, standard
wills and revocable living trusts.
After the estate planning is complete, any ownership or beneficiary designations should be updated.
The beneficiary update is important because at death, accounts with beneficiary designations do not flow according to the will or trust as some might think. Instead, the beneficiary designation is what directs the account.
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A fee-only financial planner and investment adviser. Comprehensive financial planners and investment advisers can be found through such national organizations as the Financial Planning Association and the National Association of Personal Financial Advisors.
A professional can alleviate Jenna's concerns by providing investment management of the portfolio.
The adviser should determine an asset allocation suitable for meeting John and Jenny's income needs. This information will be pivotal in determining portfolio design recommendations.
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A tax preparer. If Jenna or James do not feel capable of preparing their parents' annual tax returns or do not want to take on this additional task, they should identify a tax preparer for this purpose.
If James is taking care of the monthly bills and overseeing the investment manager, this responsibility might rest with him and can be accomplished regardless of his location.
Vacation home. During the initial family meeting, James and Jenna need to be honest about their plans for usage and long-term desires for the vacation home.
John and Jenny want the home to continue to be in the family. However, there are maintenance costs, and the sale proceeds could give them a wider choice of living arrangements.
Jonathan's education. Since Jenna's husband died, John and Jenny have been actively involved in the upbringing of their grandson Jonathan. Paying $10,000 a year toward his college education is important to them but needs to be evaluated in light of their future health costs and living needs.
If they can meet their own needs without this $10,000 per year, they could consider pre-gifting enough to a Section 529 plan for Jonathan to cover his four or more years of higher education.
Daily bill paying. Daily bill paying could be handled through an online bill-paying service. These services offer a variety of features, and some accommodate paper bill scanning that would keep the parents' bills in an electronic file separate from either James' or Jenna's household mail. With electronic files, James and Jenna could view the bills and/or payment history online at their convenience.
Communication. Jenna and James should have regular conversations focusing specifically on these matters, thereby preventing the parents' situation from monopolizing every conversation. In addition, the family could meet annually to revisit higher-level issues such as, “Do we still have all the correct professionals on our team?” and, “Is our method and frequency of communication still working successfully?”
Susan M. Steel is executive vice president of Deerfield Financial Advisors Inc.
