Is 100 the New 80?

Scientists have spent the last 200 years discovering how to help people live longer … and they may have succeeded. Chances are increasing that you or your spouse will live well into your 90s or beyond.

Suddenly, estate attorneys, financial planners, and investment advisors are struggling to figure out how to adapt. Old rules of thumb may need to be thrown out.

Shifting Assets Back to Your Parents. We now need to reconsider gifting strategies to move assets from older generations to adult children and grandchildren. Long advocated as a method of reducing exposure to estate taxes, now the oldest generation may be running out of assets.

In addition, with the (possibly temporary) shift in tax law away from estate tax toward income tax and a high lifetime gift tax exemption, the risk of dying with a taxable estate has declined.

The value of the step-up in tax basis at death, however, may get overlooked. Some families are working hard to figure out how to efficiently shift low-basis assets back to older family members to receive better capital gain treatment for appreciated assets.

“Retirement” Planning. No longer is the term “retirement” appropriate for the 30+ year period from age 65 until death. The MIT AgeLab has produced excellent research that subdivides what it considers the 8,000 days of retirement into four distinct periods:

• The Honeymoon Phase: With money, good health and time, you can enjoy new hobbies and travel.
• The Big Decision Phase: Choose where to live, when to downsize (or upsize) during this phase.
• The Navigating Longevity Phase: Money, health, mobility and cognitive abilities start to decline.
• The Solo Journey Phase: The loss of a spouse may open doors to new life experiences.For more information Google: MIT AgeLab 8,000 Days.

Income and expenses can vary widely during these four phases. Careful planning during The Honeymoon Phase can result in less stress during The Solo Journey Phase. This is particularly important for women, who tend to live longer but be less involved in family decisions about money.

In this setting, the need for holistic financial planning is obvious, but the implications for investing are less clear. Therefore, it is worth considering:

• If you may live to age 105, can you afford to shift your investments toward bonds when you are 65?
• If the low interest rate environment that has existed since 2008 in the U.S. (and since 1990 in Japan) continues, are traditional Investment grade bond investments a worthwhile option?

Crisis Approaching. What’s the difference between a problem and a crisis?

A “problem” typically has a solution. You may not like it. It might be expensive or inconvenient, but if you look hard enough, a solution exists.

The key attribute of a “crisis” is the lack of an Immediate and obvious solution. You are in uncharted waters.

During the 2008 financial crisis, for example, there was no emergency plan for how to deal with the collapse of Bear Stearns, Lehman Brothers, Fannie Mae, Freddie Mac, and AIG. The solutions – including the Troubled Asset Relief Program (TARP) and Quantitative Easing (QE) – required experts to be creative and implement untested policies.

Increased longevity itself could be considered a crisis, as there is no tested solution for how to manage the extended years. Many wealthy families may feel this when considering finances, given the uncertainties around healthcare costs, ever-changing tax legislation, and unpredictable investment returns. No off-the-shelf solution exists to address the impact of these factors on wealthy families. In addition, traditional advice given by estate attorneys, financial planners, and investment advisors may be completely inappropriate if 100 is the new 80.

The urgency of the situation is increasing. According to research by the Cleveland Clinic, 50% of people aged 85+ have some cognitive impairment. Parents cannot afford to wait until their 90s to involve their adult children (who themselves are likely in their 60s and 70s) in these complex issues. Adult children cannot afford to wait until their parents need help before they become educated in their parents’ healthcare and financial issues.