July 1, 2018, Frankj: Advice for Preparing Financially for Cognitive Decline

July 1, 2018....Bob Brinker took today off to celebrate the 4th of July week. (comments welcome)

FrankJ has summarized and added to a treatise about making a financial plan for later years that might include cognitive decline. Frankj wrote: 

I referenced an article I read on the SeekingAlpha.com website.  The title is:  Defending Your Retirement Financial Plan From Cognitive Decline.   The author is ISTJ investor which is a screen name he (or she) uses, so I don’t have the actual name.   It was posted about June 20^th and unless you subscribe to SeekingAlpha (which I do not) it is no longer available since they put articles behind a paywall once they’re over 10 days old.  I downloaded the article though and summarize parts of it below. 

About half the article covered medical information on cognitive decline:  Alzheimer’s, dementia, etc.  Who was susceptible and at what ages.  Interesting but too lengthy to go into here.   

I’ll put my comments in italics to distinguish them from the actual author’s writing.

As background, society at large recognizes that cognitive decline is something to face when people get into their 60’s and 70’s.  From the article:

·         A  2016 Harvard Business Review article notes that more than a third of S&P 500 companies have a mandatory CEO retirement age.

·         A 2017 study found that about 40% of S&P 500 companies disclose a mandatory retirement age for board members, with 72 being the most common age.

·         Over 30 States have mandatory retirement ages for judges, with 70 being the most common age.

·         Air traffic controllers are normally required to retire at 56.

·         Although there is no mandatory retirement age for doctors, this article reports that 5-10% of hospitals have begun mandatory evaluations for doctors at 70 or 75. At one hospital, 7 of 35 doctors over 70 gave up hospital privileges rather than be evaluated.

·         And finally, the Financial Industry Regulatory Authority has adopted rules 4512 and 2165, which encourage fiduciaries to identify a Trusted Contact and apply additional oversight to specifically to accounts held by people over 65.

Tradition - distilled empirical observation - suggests that cognitive risk increases somewhere around 70.  It's worth pointing out the relatively tight grouping of ages in the above policies. If there is a cognitive performance retirement policy at all, it's almost unanimously before age 75.  People today can reasonably expect to live into their 80s, and arguably their retirement plans should accommodate living into their 90s. It looks like a risk.

We are all subject to Normal Aging.   The probability of this is 100%.   With regard to financial planning the impact is none to very little.   Symptoms might be slower processing speed, memory and slower decision making.  

Mild Cognitive Impairment might affect 15 to 20% of us.  The impact is  reduced  capability to manage even routine financial activities.  The symptoms are noticeable declines in memory, information processing, decision making, and risk assessment.

Dementia might affect 10-35%  of us.  The impact is a catastrophic loss of capability.  The symptoms are a decline in memory and other areas, increasingly unable to care for oneself

The author’s operational assessment is: 

·         The risk of material cognitive impairment during retirement is real

·         The risk should be explicitly considered in retirement financial planning

·         The probability is > 10%, perhaps > 20%

·         The probability increases with age

·         The impact can be moderate to catastrophic

·         Plans should anticipate mild impairment of 5 or more years

·         Plans should anticipate significant impairment of 2-3 years

·         Basic precautions should be in place by age 70

·         Precautions should be finalized by age 75

The author’s recommended plan:

Critical legal documents

Perhaps most importantly ensure that you have the legal documents that appoint and empower an agent to manage your medical care, your financial affairs, and your estate, should you no longer be able to do so.

This will include at a minimum an advanced medical directive, a healthcare power of attorney, a durable financial power of attorney, a will, and potentially one or more trusts.

An amazing number of people don't even have a will. According to a 2016 Gallup poll, 44% of those in the 50-64 age group, and 32% in the 65+ group, and 25% of age 55+ with income of $75,000+ do not have a will.

I'll just close this section by saying that in the event they are needed, each of these will be extremely useful to the agent trying to take care of you and carry out your wishes.

Good Housekeeping

Life is easier if things are in good order. This may become particularly important if your agent is trying to step in to handle your affairs.

Put your financial status and plans in writing. I personally have a Financial Plan document in Word and a multi-tab Excel spreadsheet. Between the two, everything from the location of my safe deposit box to projected RMD distributions is readily available.

Other housekeeping  things to consider:

·         Ensure all financial accounts are correctly titled.

o   Maybe your spouse passed away and you had joint investment accounts.  You want to put them in your name only.

·         Ensure beneficiaries on accounts are correct and current

o   Very important.   I’m not a lawyer but I know that you do not need to put anything about beneficiaries to an IRA account in a will because the beneficiaries that the custodian has on file are the ones who’ll get the dough.

o   Keep a hardcopy of the beneficiary designation form.

·         Document - financial accounts (checking, savings, investments), pensions, annuities, trusts, alimony, real property, insurance policies (life, medical, long term care, house, renter, auto, umbrella, flood), debts, credit cards, safe deposit boxes

·         Clean up your physical files (buy a shredder ?? and if you do, don’t buy an el Cheapo).

·         Write down login and passwords; keep them secure but accessible to your agent.

·         Ensure you have backups for digital files

·         Name a Trusted Contact for each of your fiduciaries

o   I think you’d want to include your tax preparer as one of these fiduciaries and let them know who your agent is  and that he or she has your ok to work with the tax preparer if needed.  Tell your agent who your tax preparer is, if you use one. 

·         Review security; freeze your credit.  

·         Create a checklist for the surviving spouse on death of first-to-die spouse

·         Put desired funeral/burial arrangements in writing

·         Review all this with your agent, by age 70

·         To this list I would add having hardcopies of the last few years of tax returns available.  Three years is good, seven is better.  What if someone passes away and by coincidence a letter arrives from the IRS questioning a past return?  

Simplify

Consider simplifying your financial affairs where it makes sense, and meets your objectives. You may be able to reduce the burden on yourself, operating at less than 100%, or a surviving spouse, or your agent.

I'll give two examples from personal experience. In the first case, a surviving spouse was left with critical retirement assets tied up in a closely held company. While growing and profitable, it yielded little income, and was not routinely liquid. In the second case, the surviving spouse was left with a portfolio of difficult-to-manage rental properties.

And I’ll add one of my own.  The sister of a friend died and her IRA went to three people, two of them were her nephews in their 20’s.  The third one was her mother, about 80.  Her executor was not financially aware.  He could have had the mutual fund company split the assets into three beneficiary accounts – each with its own mandatory withdrawal rate.  There is a time limit for this and it passed without the accounts being split up.  So, the mandatory withdrawals were based on the OLDEST beneficiary’s age, in other words, the Grandma.  Their distributions are higher than they would be if they inherited separately.  Both the young men are working so they don’t especially need the extra income, which is taxed as ordinary income.

Some specifics actions to consider while simplifying:

·         Cancel unneeded credit cards

·         Consolidate 401(k)s, IRAs, and other retirement accounts

·         Consolidate accounts to fewer fiduciary institutions

·         Simplify portfolio

·         Sell non-liquid or difficult to manage assets

·         Sell out of state property

·         Set a schedule to sell your residence

As an example, simplifying your portfolio might mean consolidating four mutual funds and a dozen individual stocks into a single target date fund.   

Today, July 1, 2018 in a repeat show, Bob Brinker told a caller that he thought target date funds were for people who didn’t know what they were doing.   I don’t agree with Bob although I do not use them myself.  

I would add instead of a target date fund, 

·         A balanced fund or, 

·         A large cap fund and a bond fund or, 

·         A total market fund and a bond fund.

The point is, the fund or funds need to satisfy YOUR needs if income generation is an objective.  You’re not dead yet,  so don’t worry too much about what your heirs might be faced with in the funds they inherit.  They can always change things, just don’t stick them with some high expense ratio funds in case inertia takes hold.

The author did not go down all the rabbit trails of types of accounts and tax ramifications.  Probably not enough space or it might be grist for a future article or because the focus was on a living person-- in decline.  I’ll add here that someone may not want to convert holdings in a personal account to one, or just a few mutual funds.  The tax consequences are not appetizing.  If this account is inherited, the heirs can liquidate if they wish, and probably owe very little in taxes because they get a stepped up basis.

A spouse gets to treat an inherited IRA as his/her own.  So they can change the type of fund it is in if they wish.  The biggest risk is an inexperienced spouse falling into the clutches of a greedy financial planner.  A solid agent can help with that especially if the deceased left behind clear instructions.

Put your financial affairs on auto-pilot

Once your financial affairs are in order, and appropriately simplified, consider automating them to the extent feasible; the model here is to put your financial affairs on auto-pilot. 

Your agent may be trying to act in your interest for several years.  Plan ahead to make it easy on them; in the meantime, make it easy on yourself.

Some specifics to consider:

·         Automate bill payment - utilities, rent, insurance, credit cards

·         Pay recurring bills with a bank draft where possible

·         Automate re-investment and asset allocation changes

·         Add your agent to your safe deposit box signature list if you have one.

·         Add agent to checking account signature list

·         If you have an in-home safe, your agent should have the combination.

Communicate

Talk to your agent. They need to know they ARE your agent, and agree to take on the task. They need to understand at least in general your plans and wishes, what documents and files you have, and where to find things.

The author does not go into how to pick an “agent” or what the skills of the agent need to be although they are implied.  Here are my thoughts.   

·         The agent must be WILLING as mentioned above and they must KNOW they are the agent.

·         They are going to be acting as a fiduciary so it follows they must be honest to the max. 

·         It should be someone who will outlive you, or at least not go down the track of cognitive decline in parallel.

·         It should be someone who understands your goals – this means you need to state them clearly. 

·         Your executor might make a good agent, if willing.  

·        A responsible child might make a good one.  If there are a number of kids, explain why one is being chosen over others.   Along this line, if you haven’t taught your kids about money management, maybe now is a good time to start.  If they are grown up you probably know which one would make a good “agent.”

Honey here: Thank you so much, Frankj!

(My market and Bob Brinker update is below this post.)

READ AND POST COMMENTS