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  • 1. Analyzing your Client's Healthcare Concerns in Retirement For CPA's and Consultants PDRP Plus PDRP Plus COPYRIGHT 2014 JACK P PAUL ACTUARY LLC March 2014

2. Health Care is one of your clients biggest concerns 79% of consumers are unable to accurately estimate health care costs in retirement (Source: Nationwide Survey Health Care Costs in Retirement. Consumer study of 625 respondents - January 2012.) 45% of consumers want to talk to advisors about health care (Source: Helping Clients Plan for Healthcare Costs in Retirement, FA Strategy Guide, Merrill Lynch Wealth Management, Bank of America Corporation, (2010).) COPYRIGHT 2014 JACK P PAUL ACTUARY LLC 3. Health Care and Advisors COPYRIGHT 2014 JACK P PAUL ACTUARY LLC Only 7% of advisors feel they are well-equipped for client retirement needs in the area of health care! (Source: Retirement Readiness. Its Crunch Time for Advisors Helping Boomers Prepare for Retirement, RydexAdvisor Benchmarking, Inc., (March 2007).) 4. Health Care and Retirees What can you tell your clients, who are at or near retirement, about their future health care costs? Will the costs be very small? Will they be larger but manageable? Will the expenses of one spouse force the other spouse into poverty? Will buying insurance solve the cost problem? MANY QUESTIONS TO ANSWER - It is impossible to boil the costs down to a single estimate! - The best that can be done is to produce a probability distribution of the costs. Sometimes the probability distributions are described as ranges of future costs. - The good news is that the probability distribution can be customized to each client! COPYRIGHT 2014 JACK P PAUL ACTUARY LLC 5. PROBABILITY DISTRIBUTIONS COPYRIGHT 2014 JACK P PAUL ACTUARY LLC 6. What are Probability Distributions? Probability distributions give the chances that the costs will be of various levels. For instance, there could be a 40% chance that there will be no costs, a 60% chance that the total costs will be less than $40,000, a 90% chance that the costs will be less than $200,000, and so on. They will be expressed here as charts of probabilities and costs. COPYRIGHT 2014 JACK P PAUL ACTUARY LLC 7. Customizing the Probability Distributions The probability distributions depend on many characteristics (of the client): o Age o Mortality (the probability of each client living to various ages) o Morbidity (the probability that they will need long-term care or other health care) The mortality and morbidity of the client can be determined by the use of questionnaires. These questionnaires ask about aspects of the client to determine mortality and morbidity. There are simplified versions of the questionnaires if desired. As youll see, the levels of mortality and morbidity make a great difference in the range of future costs! COPYRIGHT 2014 JACK P PAUL ACTUARY LLC 8. The Smiths vs The Johnsons Probability Distributions COPYRIGHT 2014 JACK P PAUL ACTUARY LLC 9. How Do Costs Look For D i f f e r e n t C l i e n t s ? THE SMITHS THE JOHNSONS MALE & FEMALE AGE 65 65 CURRENT HEALTH STATUS VERY HEALTHY MODERATE HEALTH Male Life Expectancy 20.2 years 14.3 years Female Life Expectancy 23.8 years 16.4 years Current Insurance (Long-Term Care) Insured at Preferred Class Insured at Standard Class Chronic Conditions None Mr. Johnson has 2 chronic conditions (High Blood Pressure and Arthritis) Mrs. Johnson has 3 chronic conditions (High Blood Pressure, Arthritis and Mild Respiratory Disease) Long-Term Care Cost Level Desired "Rich" (see note below) Average (e.g. private room in nursing home if ever needed) OVERVIEW 2 Couples both 65 Years Old 10. Probability Distributions The Smiths and the Johnsons Probability distributions (range of costs) for just long-term care These costs are computed based on: The ages at death are not fixed, but rather the life expectancies of Mr. and Mrs. Smith (or Mr. and Mrs. Johnson) are used to compute the probabilities of living to different ages. Long-term care can occur at different ages for different lengths of time at various levels of care. COPYRIGHT 2014 JACK P PAUL ACTUARY LLC The next slide shows a chart showing the amounts that must be set aside to fund the couples long-term care costs (e.g. the present value of long-term care costs). The present values are calculated at 4%. 11. Present Value of Long-Term Care Costs Probability Amount of Assets Set Aside Wont Exceed: 1% $0 5% $0 10% $0 15% $0 20% $4,000 25% $9,000 30% $18,000 35% $28,000 40% $40,000 45% $55,000 50% $69,000 55% $89,000 60% $109,000 65% $131,000 70% $161,000 75% $194,000 80% $243,000 85% $319,000 90% $443,000 95% $689,000 99% $1,261,000 99.50% $1,510,000 Chart Displays the Probabilities that the Future Long-Term Care Costs of the Smiths Will Be Met By Setting Aside Certain Levels of Assets (displayed before tax) This chart shows that over 15% of the time, the clients will have no long-term care costs. In fact, over 50% of the time the costs seem manageable. However, there is a significant chance that the Smiths will have to set aside over $100,000. There is a small chance that the Smiths will need a million dollars or more from their assets to cover their long-term care costs! These numbers are present value numbers. The next slide shows the range of costs on a dollars to be spent basis. COPYRIGHT 2014 JACK P PAUL ACTUARY LLC THE SMITHS 12. Dollar Value of Long-Term Care Costs Over Their Lifetimes Probability Total Dollar Costs Wont Exceed: 1% $0 5% $0 10% $0 15% $3,000 20% $12,000 25% $23,000 30% $40,000 35% $64,000 40% $93,000 45% $125,000 50% $161,000 55% $206,000 60% $253,000 65% $307,000 70% $372,000 75% $456,000 80% $577,000 85% $765,000 90% $1,093,000 95% $1,747,000 99% $3,420,000 99.50% $4,151,000 Chart Displays the Probabilities that the Future Long-Term Care Costs of the Client Will Be at Various Levels (displayed before tax) ` These costs are much higher than the costs displayed in the previous slide, as there is no discounting for interest in this slide There is a significant chance that the Smiths will have to pay over $250,000 in their lifetimes. There is more than a 10% chance that the costs will be over a million dollars! Since present values are more important than ultimate dollar costs for planning purposes, that will be the focus for the rest of the presentation. THE SMITHS 13. Probability Amount of Assets Set Aside Wont Exceed: 1% $0 5% $0 10% $0 15% $0 20% $4,000 25% $9,000 30% $18,000 35% $28,000 40% $40,000 45% $55,000 50% $69,000 55% $89,000 60% $109,000 65% $131,000 70% $161,000 75% $194,000 80% $243,000 85% $319,000 90% $443,000 95% $689,000 99% $1,261,000 99.50% $1,510,000 Chart Displays the Probabilities that the Future Long-Term Care Costs of the Smiths Will Be Met By Setting Aside Certain Levels of Assets (displayed before tax) Snapshot of the long-term care risk both in terms of magnitude and variability. Customized to the Smiths, based on their longevity and morbidity. Later, well look at what the addition of long-term care insurance does to the chart. Present Value of Long-Term Care Costs CORNERSTONE OF PLANNING FOR THEIR FUTURE Next slide shows Present Value of the Johnsons Long-Term Care Costs THE SMITHS 14. Probability Amount of Assets Set Aside Wont Exceed: 1% $0 5% $0 10% $0 15% $0 20% $2,000 25% $7,000 30% $13,000 35% $22,000 40% $34,000 45% $46,000 50% $62,000 55% $79,000 60% $96,000 65% $115,000 70% $138,000 75% $167,000 80% $209,000 85% $272,000 90% $369,000 95% $558,000 99% $980,000 99.50% $1,124,000 Chart Displays the Probabilities that the Future Long-Term Care Costs of the Johnsons Will Be Met By Setting Aside Certain Levels of Assets (displayed before tax) ` Next slide compares the Smiths and Johnsons side by side. Present Value for the Johnsons Present Value of Long-Term Care CostsTHE JOHNSONS 15. Probability Smiths Johnsons 1% $0 $0 5% $0 $0 10% $0 $0 15% $0 $0 20% $4,000 $2,000 25% $9,000 $7,000 30% $18,000 $13,000 35% $28,000 $22,000 40% $40,000 $34,000 45% $55,000 $46,000 50% $69,000 $62,000 55% $89,000 $79,000 60% $109,000 $96,000 65% $131,000 $115,000 70% $161,000 $138,000 75% $194,000 $167,000 80% $243,000 $209,000 85% $319,000 $272,000 90% $443,000 $369,000 95% $689,000 $558,000 99% $1,261,000 $980,000 99.50% $1,510,000 $1,124,000 Chart Displays the Probabilities that the Future Long-Term Care Costs of the Smiths and Johnsons Will Be Met By Setting Aside Certain Levels of Assets (displayed before tax) ` The Smiths numbers are higher in general. This is due to their significantly longer life expectancies, which overcomes the better morbidity of the Smiths. The numbers in the chart diverge significantly at the higher probability levels (the tail of the liabilities). At the 85% level, the present value of the Smiths costs are over 17% higher than the Johnsons costs. At the 95% level, the costs are over 23% higher. The average present value for the Smiths is $164,000 and for the Johnsons is $135,000 a 21% difference! Observations Present Value of Long-Term Care CostsTHE SMITHS vs THE JOHNSONS 16. Customization is Important! Each Client is Different Probability Smiths Johnsons 1% $0 $0 5% $0 $0 10% $0 $0 15% $0 $0 20% $4,000 $2,000 25% $9,000 $7,000 30% $18,000 $13,000 35% $28,000 $22,000 40% $40,000 $34,000 45% $55,000 $46,000 50% $69,000 $62,000 55% $89,000 $79,000 60% $109,000 $96,000 65% $131,000 $115,000 70% $161,000 $138,000 75% $194,000 $167,000 80% $243,000 $209,000 85% $319,000 $272,000 90% $443,000 $369,000 95% $689,000 $558,000 99% $1,261,000 $980,000 99.50% $1,510,000 $1,124,000 Chart Displays the Probabilities that the Future Long-Term Care Costs of the Smiths and Johnsons Will Be Met By Setting Aside Certain Levels of Assets (displayed before tax) The costs can vary even more at the client level than between the Smiths and the Johnsons. The analysis should be based on the individuals and not general levels of costs!