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by Thomas C. West, CLU®, ChFC®, AIF®; and Steven A. Starnes, CFP®

Thomas C. West CLU®, ChFC®, AIF®, is a partner with Signature Estate and Investment Advisors in Tysons Corner, Virginia. He holds an MBA from the University of Pittsburgh’s Katz Graduate School of Business.

Steven A. Starnes, CFP®, is a principal with Grand Wealth Management in Grand Rapids, Michigan. He holds an MBA from the University of Virginia’s Darden School of Business.

It is estimated that the majority of 65-year-olds will need long-term assistance at some point.1 While most financial planners know that most families will need help, many do not explore long-term services and supports (LTSS) planning beyond an analysis of long-term care (LTC) insurance needs.

Planners can guide clients requiring LTSS to make better financial decisions with a fiduciary process that includes appropriate communication, relationship management, and technical skills. The focus here is not LTC insurance or planning for the possibility of care in the future, but rather how financial planners can optimize income, investment, and tax planning during a period of care.

Liquidity Considerations

Often the worst financial scenario confronting clients who are facing a period of care is a procrastination-induced liquidity crunch. Because of uncertainty about the future period of care, clients who are self-financing care costs typically spend cash reserves first (because it is easy), and then face the remaining “buckets” of money (stocks, bonds, IRAs, etc.) not knowing what to tap next.

Because the appropriate “next” asset to use varies by household, a planner should first estimate how much liquidity to maintain: a good professional rule of thumb is six to 12 months of net expenses in cash or similar instruments. A one-year cash reserve strategy can increase the probability a plan will succeed and can improve a client’s sense of control as well.2

For families uncertain about future expenses, consider basing liquidity recommendations on a worst-case scenario. For example, the six-to-12-month liquidity recommendation for a client at the outset of a dementia-related plan of care might include the cost of living at a memory support facility.

Addressing Unsustainable Withdrawal Rates

A growing number of firms are instituting processes that require signed client acknowledgement that certain withdrawal rates (typically greater than 5 percent) may be unsustainable given the underlying investments.

While this notification alerts clients to the pressure on their financial security, it does not make the money last longer. One wealth accumulation strategy for volatile markets is dollar cost averaging in which fixed investment amounts are used to purchase fewer shares in a market peak and more shares in a market trough; over time the hope is that more investment shares will be secured and, presumably, more wealth.

However, the strategy also works in reverse: without proper management, a persistent, unsustainable withdrawal rate could force a portfolio manager to sell more shares in a trough and fewer shares in a peak in an attempt to keep up with the withdrawals. In other words, an unsuspecting family could find their portfolio gutted by unsustainably high withdrawal rates “before the ‘good’ returns finally show up.”3

Unless portfolios are quite large, annual costs of LTSS of between $100,000 and $150,000 represent a very high withdrawal rate if fully funded from investment accounts. Consequently, planners need to rigorously assess the portfolios that support LTSS costs.

In addition to stock market fluctuation, volatility is also caused by duration or interest rate risk. For example, between July 1 and Dec. 30, 2016, interest rates on 10-year U.S. Treasury bonds rose from 1.46 percent to 2.44 percent. In their 2016 quarterly Guide to Markets, JP Morgan Asset Management illustrated that a 1 percent rise in 10-year Treasury bond yields affects the price of the bonds by –8.5 percent. Such a fluctuation could mean a family needing to pull $100,000 from a $1 million portfolio of U.S. Treasury bonds (a 10 percent withdrawal rate) would see an $88,000 concurrent duration loss on the price of the bonds.

Best practices in portfolio management during unsustainable withdrawals vary widely by client. For example, a person requiring LTSS may have a shorter life expectancy than a typical retiree or may have a surviving spouse who needs to be supported by the portfolio for many more years.

When withdrawals are expected to be higher than usual to fund LTSS, the planner may wish to reduce the overall risk level of the portfolio and maintain a year of cash reserves. Additionally, allocating at least four years of projected worse-case expenses in lower volatility short- and intermediate-term bonds should be considered. Most people do not require LTSS for more than five years, according to the Department of Health and Human Services. Equally important is reducing worry for clients and their families about how to pay for care. More research is needed regarding the alignment of optimal portfolio design, market volatility, and the funding of LTC scenarios.


A New Look at the Liquidation Sequence

The conventional wisdom on liquidation is to structure the source of withdrawals on the basis of the most tax-efficient path: cash first, then bonds and stocks from a taxable account, and finally tax-deferred assets. This algorithm is embedded in most financial planning software, including MoneyGuidePro and eMoney.

When modeling LTSS scenarios with planning software, the planner may overlook significant value. The traditional liquidation sequence may lead to higher risk and taxes and less money for care. If there are significant deductible health expenses, withdrawing from a qualified plan first, or much earlier than the traditional sequence would suggest, may be the appropriate action. The health expense deduction may make this non-intuitive distribution tax free if calculated correctly. For example, health expenses of $100,000 may offset a $100,000 IRA distribution, reducing tax by as much as $20,000 to $30,000. This savings could extend the time that funds last, allow for additional care and support, or leave more for family beneficiaries.

Actively plan to keep as many financial options open as possible as the client’s situation evolves. Further consideration should be given to the time of the year that the financial planner is giving guidance about paying for care. For example, in some cases it makes sense to take an entire required minimum distribution with no withholding tax early in the year, because in all cases (including death) the distribution needs to be taken in the tax year anyway, and the distribution might keep another option, like cash, available for a different time and circumstance.

Planning toward the end of a tax year should consider Schedule A medical expense deductions incurred year-to-date, so a calculation about accelerating IRA/qualified plan distributions and/or realization of capital gains can be made for guidance. According to IRS Publication 502, care expenses are deductible for people who require substantial supervision and/or need help with at least two ADLs for at least 90 days.

Payments for Care and Income Tax Planning

Once the planner, with input from a care professional, has determined a client’s new financial circumstances including projected costs for care, several areas will require attention. A pro forma 1040 is the optimal way to estimate current income tax exposure and develop advice for the client. A projection of income and costs of care through the end of the year can provide a helpful short-term view of a possible financial future. Typical conclusions include:

Discontinue withholding on the client’s taxable income.

The annual required minimum distribution should be taken immediately. This step can provide short-term liquidity (withdrawal must be in a given year, even if the IRA holder dies).

Increase taxable income by distributing additional funds from an IRA or retirement account in anticipation of (or accounting for) deductible medical expenses. A Roth IRA conversion might also be considered.

The table on above illustrates critical considerations when creating an appropriate withdrawal sequence for financing LTSS compared with a more traditional sequence.

Reverse Mortgages to Finance LTSS Costs

Reverse mortgages have received a warmer reception from financial professionals after the adoption of new Home Equity Conversion Mortgage (HECM) standards in 2013, and they may provide benefits in some circumstances for those incurring LTSS costs. High upfront fees, however, and residency requirements for seniors (age 62 and older) to live in the residence create trade-offs that should also be considered.

Establishing an HECM line of credit early in retirement, but delaying its use, can also provide meaningful downside protection for retirement income.4 An HECM line of credit can be a good source of liquidity during a bear market and can meaningfully increase sustainable withdrawal rates, especially when implemented early in retirement and in a low- or moderate-interest rate environment.5

Use of Other Debt

Be cautioned regarding use of debt in paying for long-term care. Occasionally a circumstance arises where a traditional brokerage account could be used as collateral for a pledged asset line of credit, but persistent unsustainable withdrawal rates from the account would unwind the line of credit, similar to a margin call.

Family loans, sometimes with repayment terms built into expectations in an estate plan, can be very problematic and require the guidance of a skilled trust and estate attorney. Loaned payments made by family members directly to care providers can subject the family to unanticipated problems regarding who is the party responsible for ongoing payments. The necessary documentation of family loans might present challenges if the family ultimately needs to qualify for Medicaid.

Occasionally, loans against real estate or other property that can be collateralized might make some sense, if the market for selling the properties involves long periods on the market.


When a client faces a period of care, optimizing liquidity, risk, and tax planning can often provide significant financial value and peace of mind for those clients and their families.


  1. See the Congressional Budget Office publication 4240, “Rising Demand for Long-Term Services and Supports for Elderly People” at
  2. See “The Benefits of a Cash Reserve Strategy in Retirement Distribution Planning” by Pfeiffer, Salter, and Evensky in the September 2013 issue of the Journal.
  3. See “Understanding Sequence of Return Risk—Safe Withdrawal Rates, Bear Market Crashes, and Bad Decades,” by Michael Kitces at
  4. See “Incorporating Home Equity into a Retirement Income Strategy,” by Wade Pfau in the April 2016 issue of the Journal.
  5. See “Increasing the Sustainable Withdrawal Rate Using the Standby Reverse Mortgage,” by Pfeiffer, Salter, and Evensky in the December 2013 issue of the Journal.

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