Journal of Financial Planning: December 2023
By Alexandra Armstrong, CFP®, CRPC
Alexandra Armstrong, CFP®, CRPC, is founder and chairman emeritus of Armstrong, Fleming & Moore Inc. (https://afmfa.com). She was one of the first female CFP® practitioners in the United States, as well as the first female president of the IAFP (precursor to FPA). She founded her financial planning firm in 1983 in Washington, D.C. Since then, she has focused on helping women achieve financial independence. She is the coauthor of Your Next Chapter: A Woman’s Guide to a Successful Retirement and On Your Own: A Widow’s Passage to Emotional and Financial Well-Being.
The primary reason I go to the FPA conferences each year is to update my knowledge—that and to get caught up with long-time financial planning friends from across the country! This year’s conference in Phoenix did not disappoint me. There was a variety of worthwhile topics to choose from that expanded my knowledge base—many of which involved women and retirement planning. Here are a few highlights that I thought you might find valuable.
How to Communicate with Clients in Times of Stress, Uncertainty, and Loss
I have heard Amy Florian talk many times but somehow each time she manages to deliver new and interesting material about helping clients to adjust to life’s transitions. She started her talk by citing a study taken by YCharts of their clients in 2022 as to the reasons why 27.3 percent had switched advisers in the past three years and 29.8 percent considered it. The first reason was market returns (whether real or perceived). The second was the client did not think the adviser had a “deep understanding” of the client’s life and goals, and the third was the adviser’s lack of communication that was effective, accessible, and available to the client.
You may have heard Amy talk before about how advisers can be more effective working with their widowed clients. In this talk, she broadened the topic to all kinds of loss and pointed out these are tough times and there are many kinds of loss and grieving.
She cited six types of loss that your clients might be experiencing. First there are relationship losses, which include death, divorce, a move to a new location, a job change, estrangement from a child, a friend with radically different political views, and even the loss of a pet. Then there are material losses of treasured possessions such as a sale of a home, money, and even an iPhone! Also, there is the loss of your role when the child takes care of the parent, the caregiver becomes the recipient, you lose your job, or retire. There is functional loss due to aging, accidents, or surgery. This includes non-temporary losses such as Parkinson’s and dementia. There is psychic loss—loss of dreams for your future due to infertility, loss of a business, didn’t meet goals, divorce, or death. And finally systematic/assumptive loss such as loss of belief in our government, health system, or justice system. Also, there can be the loss of prior assumptions that life is fair if you work hard, success will come, etc. I won’t give you the entire speech, but I thought her basic theme provided additional insights we can use with our clients, particularly women planning for retirement, which is a major change in their lives.
Achieving a Successful Long-Term Care Planning Conversation with your Clients
In my last column, I mentioned how helpful long-term care insurance can be for clients, particularly women. Margie Barrie is someone who has specialized in giving advice on long-term care life insurance for many years. Margie said that by 2030 there will be 18 million more older adults (Mather, Jacobson, and Pollard 2015) and 8.5 million Americans with dementia (Alzheimer’s Association 2023). Someone turning 65 today has almost a 70 percent chance of needing some type of long-term care services and support in their remaining years (LongTermCare.gov 2020).
New trends indicate that hospitals are financially motivated to discharge patients sooner than in the past. As a result, families will pay for at-home care or assisted living or try to do it themselves sooner rather than later. Some clients think they can self-fund, but they haven’t considered that this approach would disrupt their plans to wait out a down market and preserve capital. Every dollar used to pay for care is one dollar less to produce income.
We are all familiar with traditional long-term care insurance, which has become very expensive as insurance companies have realized how much they will have to pay. As a result, hybrid policies that combine life insurance with long-term care insurance have taken over the market, accounting for 89 percent of sales last year.
You may think that your affluent clients should self-fund. However, Margie points out there are several reasons for the affluent client to consider taking out this kind of insurance. These include sequence of return risk, tax exposure risk, loss of step-up in basis, business succession plans, predictable stream of tax-free benefits, easy to use, helps with advance planning, removes uncertainty, and, best of all, provides peace of mind.
She recommends that you have a meeting with your clients and their children to make sure that they understand the coverage. Even better, getting coverage for the care of their parents increases your chance of retaining the children as clients. In some cases, the children might decide to pay for the coverage partially or totally.
She concludes that your clients’ savings face four major insurance risks: (1) your home having a fire (1 in 1,200), (2) odds of your car being totaled (5 in 1,200), (3) odds of being hospitalized (105 in 1,200), and (4) odds of needing long-term care (840 in 1,200).
For those who might want to delve deeper into this topic, I learned at one of the booths in the Exhibit Hall that there is a Certification for Long-Term Care (CLTC) and a course you can take to increase your knowledge of this topic. CLTC Master Class is a 16-hour virtual or live comprehensive classroom-based training experience designed to prepare you for this exam.
Retiring Better with Home Equity
I don’t know about you, but I have always been a little leery of reverse mortgages. I viewed them as the loan of last resort for the person who was determined to stay in their own home and had run out of money. And besides that, there were what I perceived as the high costs of taking out a reverse mortgage. However, I went to this panel discussion to see if I was missing something.
And sure enough I did gain a fresh perspective—that reverse mortgages could be used for something other than an emergency solution. The session started with the definition of reverse mortgages as a “loan exclusively available to homeowners 55+ (in some states age 60) that converts stored home equity into usable cash.” As you know, the borrower must live in the home as their primary residence, must continue to pay property taxes and insurance, and maintain the home while also upholding all other loan terms. The balance is payable at the time the borrower is no longer living in the home as their primary residence. However, since it is a non-recourse loan, this means that you or your estate can’t owe more than the value of your home when the loan becomes due and the home is sold. One fact I didn’t know was that at this point, the family can buy the home for 95 percent of its appraised value even if it is underwater.
Popular uses of the money obtained from a reverse mortgage include eliminating monthly mortgage payments, supplementing retirement income with tax-free funds, paying off high-interest debt, and establishing a flexible line of credit that grows over time. Your client can obtain distributions from a line of credit with growth, monthly installments, a lump sum, or a combo of all the above. Strategic uses of the reverse mortgage are to preserve their portfolio, establish retirement income, fund legacy plans, and delay Social Security payments.
One way to use the money from a reverse mortgage is to improve cash flow. Your client can take out the reverse mortgage, pay off the existing mortgage, and use the balance to provide themselves with monthly payments. By doing this before age 70, the client might be able to defer taking their Social Security payments. If the client is younger than 72, they could also defer taking money from retirement accounts.
But what made this panel really interesting were the participants. Jacqueline Campbell is a female financial planner who appeared with her affluent mother, Linda Taylor, CPA. It turned out that Linda, who lived in Detroit, Michigan, had used a reverse mortgage to buy a second home in Las Vegas. The transaction was somewhat complicated, but, basically, she had other investments she could have sold to finance this purchase but she wanted to avoid paying the capital gains tax. Since using the reverse mortgage to buy the Vegas house, the home has tripled in value. By taking the reverse mortgage, she had increased her net worth.
Stephen J. Resch, another panel member, works for the sponsoring reverse mortgage company. Members of his family have had health issues, so he has taken out a reverse mortgage line of credit on his home as a way to pay for long-term care should he need it in the future, thus avoiding the need to take out a policy. Although there was an initial cost of 2 percent of the value of the property plus 0.5 percent on the outstanding loan to establish this line of credit, the line of credit is earning interest as long as he doesn’t draw it down.
Conclusion
These were three interesting sessions at the FPA meeting, but there were others. Speaking personally, I think we might tend to become complacent after a while and think we know all the solutions for our clients. But what makes our profession interesting is that it keeps changing, and it’s important for us to keep current with new trends. So keep attending these conferences where you can expand your knowledge base and help your clients.
References
Alzheimer’s Association. 2023. “2023 Alzheimer’s Disease Facts & Figures: The Patient Journey in an Era of New Treatments.” https://alz.org/media/documents/alzheimers-facts-and-figures.pdf.
LongTermCare.gov. 2020, February 18. “How Much Care Will You Need?” https://acl.gov/ltc/basic-needs/how-much-care-will-you-need.
Mather, Mark, Linda A. Jacobsen, and Kelvin M. Pollard. December 2015. “Aging in the United States.” Population Bulletin (70) 2. Population Reference Bureau. www.prb.org/wp-content/uploads/2019/07/population-bulletin-2015-70-2-aging-us.pdf.