Michael Schulman

Not Too Young, Not Too Old

Do you have clients too rich to qualify for government aid and too poor to have a guarantee of a comfortable retirement? Careful planning is a necessity so these clients are not caught unprepared.

December 13, 2010
by Michael David Schulman CPA, PFS

In the Broadway show, A Chorus Line, the young dancers sing, “Too young to take over, too old to ignore. Gee, I'm almost ready but what for? There's a lot I am not certain of!”     

For many of our clients, they are too young to retire; in some cases they're too old to get a good job. 

They question what they're ready for — retirement, catastrophic illness, care of their children and possibly of their parents. And in this economy, there is not a lot they are certain of.

When many of our clients came to us they had healthy portfolios, a wonderful house and terrific jobs. Now, a few years later, they have much smaller portfolios, the house they own might be close to foreclosure, and they might be without a job. Times have changed our best clients have now become our middle-class clients.

For the majority of our clients the biggest problem they face now is the substantial loss of their portfolios. A $2 million portfolio is now $1 million, while a $1 million portfolio is now $500,000. Financial plans and income forecasts made a number of years ago are now worthless; clients are concerned that the money they have will not last for the rest of their lives as was previously forecast. For a client 55 years, 60 years or 65 years old the problem is immense because they will not earn enough to replace the lost investments. They're frightened.

Reader Note: Michael Schulman will be speaking on this topic at the Advanced Personal Financial Planning Conference. Join us from January 9-12, 2011 in Las Vegas — one of the premier events for CPA financial planners!

The specter of the long-term catastrophic illness also falls heavily upon these people. Many of them thought that when faced with such an illness they could simply pay for care out of their retirement plans or other portfolios. With the recession and a corresponding decrease in portfolio values that is no longer a realistic possibility. Too poor. For someone who has needs three years of care at a modest $250 a day such care will cost $280,000 over the course of three years. If they are going to take this money out of their retirement plans (on a pretax basis since tax will have to be paid) they going to take roughly $500,000 to pay for the medical care. The problem now becomes obvious. Clients with the $2 million portfolio which shrank to $1 million now face shrinkage to $500,000. The $1 million portfolio which are shrunk to 500,000 is now gone! If they were poor, their problem would be solved by Medicaid. But these folks do not qualify. Too rich.

Many of these clients felt that they could take the equity in their homes and live happily ever after upon reaching age 65 or 70. They could sell the house at a significant gain, pay off whatever mortgages they accumulated, and buy for cash a small retirement home and at the same time have money left over to reinvest. Unfortunately, the recession has devastated property values — many of our clients find themselves upside down in their homes. There is no purpose in selling the house. The house has become a trap for these middle-class clients. It was going to be their freedom now it's their prison. These people have been hit three ways: portfolios are down, they are not in the position to manage long-term catastrophic costs, and their principal residences have little, if any, equity. The problems feed off each other.

There are sources of assets and sources of income that clients can take advantage of:  the cash value in their life insurance policies, the 401(k) plans from work and the IRAs that they've built up. (Remember that we want to be careful in taking money out of retirement accounts because you have to take out basically two dollars for every dollar you need to spend.) A reverse mortgage on their principal residence is a way of providing monthly cash using the equity in the home. A word of caution however, reverse mortgages are very expensive.

Clients should also work to control their insurance costs. Your client should be asked to look at their insurance policies and raise deductibles, combine insurance policies with one carrier to get discounts on policies. Maybe it's time to get the children to have their own auto insurance policies. It's important to preserve life insurance policies especially for surviving spouse and especially when that's the one asset that will be the bulk of the estate left to the surviving spouse,  the recession having depleted the family portfolio family and individual retirement account (IRA).

It is also important to consider and to prepare for the cost of long-term catastrophic care. Most of these clients have been hit by the recession it will not be possible to pay for long-term care out of pocket. Long-term care insurance becomes essential for these people as a method of controlling the impact on the budget of long-term care. Many different policies are available. This article is not intended as a primer on long-term care insurance. When a client decides to qualify for Medicaid to cover long-term care costs they must deplete themselves of all of their assets leaving their spouses and perhaps other beneficiaries in a very difficult position.

Finally, clients are encouraged to review their monthly spending. Frequent trips to the ATM can quickly add up to substantial sum. Country club memberships should be re-evaluated. Does your client really need to lease a $1,000 per month luxury automobile? Ivy League colleges or state universities? You get the idea and so should your client.

Helping our clients cope with the current recession will be one of the greatest challenges that we have CPAs will face in the next few years. For many of our clients this is not only a financial disaster but a great embarrassment. We have to be prepared to help them financially as well as emotionally.

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Michael Schulman, CPA, PFS is a CPA financial planner working with older adults and their families. He is a member of the AICPA's Elder Planning Task Force and speaks and writes on issues facing our older clients.

The AICPA’s Personal Financial Planning Section is the premier provider of information, tools, advocacy and guidance for CPAs who specialize in providing estate, tax, retirement, risk management and investment planning advice to individuals and closely held entities. All members of the AICPA are eligible to join the PFP section. Don’t miss the Advanced PFP Conference at the Bellagio in Las Vegas Jan. 9-12, 2011 with a robust agenda tackling the latest issues and a special day-long session on implementing PFP in a tax practice. The Personal Financial Specialist (PFS) credential is exclusively available to CPAs who wants to demonstrate their expertise in this subject matter. If you are Series 7, 65, or 66 licensed, you have until 12/31/2010 to use that license as one of the qualifications to obtain the credential. Visit www.aicpa.org/PFP to learn more.