Financial calculators might not account for long-term care

Before COVID-19 shut down any reasonable chance of doing so, in 2019 and 2020 I spent some serious time studying to become a certified financial planner. This was in addition to my practice as an elder law attorney and my certification as a certified elder law attorney. Having completed all of the program requirements except the last course when a somewhat intimidating detailed paper was due and also, of course, not having had the opportunity to take the challenging CFP exam, I was, nonetheless, able to review some financial planning software and evaluate it in light of practical experience with elders.

One glaring omission based on my elder law experience was the lack of attention given in software to medical expenses generally and to longterm care specifically. The reason this observation was and is important to me is that I know how long-term care can devastate a carefully constructed financial plan. One bad fall or a stroke or dementia can cause a person or a couple to shift focus from how much to spend on vacations to how much is available for assisted living, home health care providers or skilled nursing care. The software I was using did not have a space for entry of health insurance premiums never mind long-term care.

I raise this issue partially because, although there are reviews of retirement calculators describing gaps in analysis (See, for instance “5 Reasons Retirement Calculators Can’t Be Trusted,” by Todd Tresidder.) I have not found one that focused on this specific deficiency. Other reviews of retirement calculators specified the assumptions to consider and found them lacking in other respects.

The Tresidder article describes them as follows:

“…all retirement calculators use the same base assumptions to work their magic: • Retirement age • Life expectancy • Inflation

• Investment return • Portfolio size • And expected retirement expenses…

…The point is the math… They’re all calculating the same thing in roughly the same way using roughly the same input…The first “deception” is described as believing the critical factor is the calculator used instead of the assumptions used by the calculator… (Tresidder).

So, according to Tresidder and others like him, the fault is in the assumptions made not the

type of calculator used. There is a brief description of “Monte Carlo” calculators which are often used to attempt to predict a range of possible results. If you have worked with a financial planner, there is a good chance your planner used Monte Carlo simulations and frankly that is a good starting point to determine needs. However, the simulation is only as good as the data input.

Kathleen Coxwell in www.newretirement.com describes “Monte Carlo Simulations: A Sophisticated Way to Predict Your Chance of Financial Success” as “when you run a Monte Carlo analysis, a computer is doing thousands of calculations to predict a range of outcomes and determine what is: A worst case scenario, A best case outcome, Everything in between…” In other words, by taking multiple variations into account the financial planner or professional is trying to predict what may happen in the future.

The assumptions Tresidder listed include: “How Long Will I Live?,” “How Much Will I Spend?,” “How Should I Estimate Inflation?,” “How Much Will My Investments Return?”

Although I have made this point before, one critical point I would make is that health and living arrangements which are central to decision making regarding the viability of a portfolio are generally disregarded in these calculations.

There is no space for these assumptions. It is not just a matter of guessing “how long I will live,” but also “how long will I live without needing some serious health care or long term care.”

Some software programs for retirement do not even include medical expense or health insurance premiums in the options. If you live to age 100 but are healthy until age 99 your plan is going to be different than if you experienced multiple health emergencies beginning at age 70. If you continue your retirement at home and never travel, the result will be very different than if you move to a continuing care retirement community and make worldwide travel a priority. Tresidder notes that plans change and assumptions need to adjust. They do. These are some of the issues we consider when advising seniors regarding their financial plan and not just estate documents. It makes a difference.

Janet Colliton, Esq. is a Certified Elder Law Attorney. Her practice, Colliton Elder Law Associates, PC is limited to elder law, retirement planning, life care, special needs, guardianship, and estate planning and administration, with offices at 790 East Market St., Ste. 250, West Chester, 610-4366674, colliton@collitonlaw. com. She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones, CSA, cofounder of Life Transition Services LLC, a service for families with long term care needs.