Long-term care is an important topic to be sure. However, many industry experts and advisors concentrate on traditional long-term care insurance or linked benefit products. Let’s focus on the real problem: Long-term care problem is a cash flow issue, not so much a capital issue.
Extended care expenses can vary widely due to the length of care, severity of condition, and level of care required. In reality, these expenses are paid more commonly through cash flow and not capital. If you are using large amounts of capital, you’re likely beginning a downward spiral. Things like basic living expenses, income for the healthier spouse or any luxuries become burdensome. The solution is having a suitable and sustainable cash flow for long-term care needs.
Now, you can argue insurance provides the necessary capital to generate that income. It’s true. But, rarely do you pay for long-term care in single lump sums to the providers. You need a steady source of guaranteed income that can be flexible enough to turn on and off in order to accommodate those changing expenses.
Longevity, specifically long-term care, generates a “smile” of expenses. Early in retirement, most people travel and visit friends and family. In the next phase, most retirees see a period of slowing down where they stay closer to home and have fewer expenses. Finally, end-of-life issues arise with health care costs that are unpredictable. Longevity is not a linear line but more of a smile – and it can become a smirk very quickly if you don’t address it.
In order to create cash that resembles a smile, you can prepare clients with guaranteed income now and later through the help of annuities. Inflation protection can come from assets under management with equities historically outpacing inflation. Additionally, income can be further supported with guaranteed cost-of-living adjustments. This can further reduce the risk on the investment portfolio and its required distribution percentage.
So, when planning for long-term care with a client, think about cash flow, not capital. By focusing on the “smile” of retirement and providing income flexibility, you can address a major concern and offset longevity risks. By having the right amount of income, your client can rest at night, knowing their care will be taken care of and their healthier spouse will not have to experience a change in lifestyle.
Create flexibility and control when it comes to income planning for long-term care. Think about cash flow, not capital, when it comes to mitigating longevity risks. While insurance provides the capital, you need to be able to provide income for varying needs.
Mike McGlothlin is a tireless advocate for the retirement planning industry. As executive vice president of retirement at Ash Brokerage, he heads a team providing income planning solutions focused on longevity and efficiency. He’s also a thought leader who provides guidance and assistance for advisors and broker-dealers navigating marketplace and regulatory changes. You can find a collection of his blog posts in his book, “Above the Clouds … Winning Strategies from 30,000 Feet.”
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