What age to plan living to

OldMusicGuy wrote: »

If we both need to go into a care home that may be a bit tougher.

That's the problem that's got me stumped. If I die quickly and cheaply my widow should be OK even if she later has to spend a few years, demented, in a care home. At the last resort the house will pay for it.

But if I, say, have a bad stroke and have to go into care for a few years then she might struggle to get by. Perhaps equity release will come to the rescue. How easy is it to do equity release when a tenants-in-common co-owner is drooling in a care home?

jamesd wrote: »

Hard for me to think of that as anything other than you being highly likely to be doing substantial harm to your clients.

The simple answer is that I would rather a client over-prepare than under-prepare. I can't know with any degree of certainty when they will die, nor can they. What I can do is work in a financially very pessimistic view of how long the money needs to last, coupled with a large expense at the end of their lifetime. In many cases this highlights a potential weakness in their plan rather than pushing them into a strategy such as retiring much later, making them realise that they might not have a level of assets that allows them to gift away large proportions of their estate for IHT planning purposes, for example.


In other cases, the client may realise that their liquid assets may be risky, but that their property is still available. They may consider whether the £20,000 holiday a year is necessary, or whether they can instead cut that to a still-enjoyable £15,000 and increase the longevity of their plans.


Alternatively they may indicate that they only want to make sure they have enough left for a one-way ticket to Switzerland if they ever need to go into long-term care.


Overall, it's a planning exercise and it needs an appropriate safety net, and that's the one I've chosen to use for my clients (again, in the absence of any other factors).

Initially, for the population as a whole, there's less than a one in ten chance of living to 100. But if you require this in planning, you're going to be requiring them to work longer and hence spend fewer healthy years in retirement.

To put it another way, one in 10 of my clients is expected to outlast even age 100, therefore they should be planning as thought this is a distinct possibility.

There are some significant mitigating factors,though. Notably that your clients are likely to be in the top quintile of wealth (about 300k and up) and well into that, so they are both likely to live longer than usual and to need to work fewer extra years to reach targets.

I also don't know how you handle the discussion of the trade-offs between more accumulation and fewer healthy years in retirement. It's one of the more interesting challenges to balance the certainty of one less retired year, probably in good health, with low probability spending events like years 95 to 100 in privately funded care. That's around one in four chance of being alive at the start, one in three of ever needing care and only two years normal care need. That ends up as a pretty low expected value for the provision.

True, but the old adage "failure to plan is planning to fail" springs to mind whenever I think about the low-probability nature of the care home scenario. Assume you have 100 clients. One in four reaches age 95, so that's 25. If one in three of those clients needs care, that's eight. Of those, four are expected to need more than two years' worth of care fees. I'd be absolutely livid with myself if I knew that four of my clients had ended up in that set of circumstances without planning for it, and I'll therefore talk through the benefits of over-planning and let them make the decision of how much of a safety net they want to build in to their plan.

Then there's investment returns. Compared to 100% success safe withdrawal rates, even average returns would leave lots of extra money. So depending on how you handle this you might also be planning for very low probability returns.

We tend to default to 1% over inflation for pessimistic plans and 3% over inflation for optimistic. This can be modified down to account for clients with very limited risk tolerance, and we also tend to incorporate at least one market shock when planning, to show what might happen with sequencing risk.

Of course you'll also have some clients who have both ample wealth and a strong inheritance provision desire. For them, planning for low probabiirty events has higher inheritance as the most likely result and they may be entirely happy with that.

Admittedly, most of my later-life clients fall into this category. That might well bias my approach towards the wealthier end of the spectrum.

These considerations of the balancing of provision for low probability outcomes vs less healthy retired years are perhaps the most challenging in the field. There's no one right answer.

Agreed - it's a monumental pain trying to work out the right approach for each case, which is why we as a firm decided that these defaults should be used unless we have a good reason to override them.

Isn't this where LPAs come in?

If they make the LPA before they are drooling (which I interpret as lost the capacity to make decisions).
Otherwise someone has to apply to the court of protection to deputyship (I'm doing this right now) and that deputy has to be sure that they are acting in the best interests of the person they deputise for, which makes it difficult to make any risky or potentially contencious decisions.

grey_gym_sock wrote: »

you either need to plan based on a very high age (100 or more) or just not plan to run out of capital at all, or you need to plan to buy an annuity (though you don't have to buy it when you retire - you could do it significantly later on, when your life expectancy is lower, hence annuity rates higher). a lot of people seem to hate annuities, but they're actually a great tool for the job of ensuring you have a decent income for live without over-saving. learn to love annuities, i say!

I will definitely be converting capital to annuities later in life on a phased basis. As you say, it's a way of ensuring a risk free income stream without leaving unused capital.

JoeEngland wrote: »

Annuity rates are terrible. Unless you have very big pension pots, are into your 60s, or have such bad health that they expect you to die early, I would avoid them. If the govt hadn't changed the rules so we don't need to take annuities then I'd be condemned to trying to work far longer than I want to even if I physically could.

I think the point is when the retiree is 75+ and not as sharp with investments as they were then partial annuitisation becomes a good insurance against longevity risk.