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 future financial 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 considering multiple variations  the financial planner or professional is trying to predict what may happen in the future. Based on a Monte Carlo analysis you might decide to buy a new home or a second home, retire early, give generously to your children or grandchildren, or stay in place, save more, invest more or invest in different ways.

What might not be considered, however, is the possibility or even likelihood that the best laid plan may not consider health or long-term care in its calculations. After all, it is not easy to determine whether and when health issues will result in expensive countermeasures to maintain a satisfactory living experience. Software might not necessarily help in this regard.

Based on my elder law experience one of the major considerations lacking in financial analysis is the lack of  attention given in software and often otherwise in financial planning to medical expenses generally and to long term care specifically. There are some planners today who recognize this issue but this factor has not yet reached the level of interest and concern it should.

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. One software program I used for an analysis did not provide space for entry of health insurance premiums, never mind long-term care. The answer is in the assumptions and the assumptions can be wrong. What this means at minimum is adjustment of assumptions over time to meet actual lifetime conditions.

There are reviews of retirement calculators describing gaps in analysis (See, for instance “5 Reasons Retirement Calculators Can’t Be Trusted,”  by Todd Tresidder), but I have not found one that focused on this specific deficiency.

The Tresidder article describes problems with assumptions as follows:

“…<A>ll retirement calculators use the same base assumptions to work their magic:

• Retirement age

• Life expectancy

• Inflation

• Investment return

• Portfolio size

• And expected retirement expenses…

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, id. (emphasis added.)

According to Tresidder and others like him, the fault is in the assumptions made not the type of calculator used.

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?”

Health and living arrangements, which are central to decision making regarding the viability of a portfolio, are generally disregarded in these calculations. 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.”

If you live to age 100 but are healthy until age 99 your plan can 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 be adjusted. These are some of the issues our office considers 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 by the National Elder Law Foundation approved by the American Bar Association and as a specialty by the Pennsylvania Supreme Court. 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., West Chester, 610-436-6674, [email protected]. She is a member of the National Academy of Elder Law Attorneys and, with Jeffrey Jones CSA, co-founder of Life Transition Services LLC, a service for families with long term care needs.


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