Would Your Retirement Plan Hold Up In Court

Would Your Retirement Plan Hold Up In Court

Would Your Retirement Plan Hold Up In Court. Interesting story I found in Forbes. That was the question I was faced with recently when I was asked to be an expert witness. I enjoy doing this type of work, but it comes with a fair amount of stress as I have to anticipate opposing counsel trying to discredit me, or at a minimum, find a major mistake in my documentation to bring my expertise into question.

Additionally, attorneys and judges aren’t financial advisors, and while many of them may have a solid grasp of the key concepts, I found myself needing to explain every minor detail, including assumptions and what-if scenarios that are usually discussed but not calculated into the plan.

To start, I had to explain why I didn’t include the client’s equity in her primary residence with her other assets. Yes, it is an asset, but they also need a place to live during retirement. Whether they stay put or use the equity to downsize and eliminate their mortgage, you can’t just throw every asset into the mix for retirement income.

That’s not to say that the client couldn’t use a reverse mortgage to extract value from the home at some point in the future, but most people don’t want to rely on that as a strategy to get them through retirement. While I would argue that this situation falls into a generally accepted planning category, the reality is, items like this are open for interpretation and can vary from planner to planner based on their background, experience, and whether or not they sell products related to reverse mortgages.

Next, I wanted to emphasize that there are factors that can absolutely destroy the very fabric of the plan including a stock market crash, investment fraud, long term care needs, increasing medical costs, or the impact of funding issues associated with an aging parent or adult child.

Obviously, something like investment fraud can’t be predicted, and stock market crashes are an inevitable part of investing, but they are very real threats that can turn a plan on its head in short order. Factors like long-term care needs and future medical costs may seem easier to include but once again, the value that an advisor assigns to these categories can vary greatly. Long-term care costs, for example, can range from $3,000 to $7,000 a month.

Using the higher number will create a greater savings/insurance need, while using the smaller number may leave the client underfunded and drawing down other assets. And what if they never need it?

The same what-if scenarios can come up with an aging parent whose fixed income no longer covers health care premiums or if an adult child who has a substance abuse issue needs treatment. I’ve had several cases where a retiree needed to withdraw over $75,000 from an IRA to help pay for an adult child’s drug abuse treatment as well as an attorney to fight a murder charge since an overdose was involved.

Then there are the questions of desired retirement lifestyle, longevity, rate of return, risk tolerance, and withdraw rate. Normally, I don’t think twice about running a retirement plan out to age 95 or 100. I often joke with clients that they can’t move in with me if we only project out to age 90 and they are still around after that.

However, jokes like that don’t go over well in court, and in fact, are likely to be the center point of an argument since a shorter lifespan would suggest a smaller amount of savings to be used in retirement. It’s one reason I use family health history to guide a planning decision like this.

Same holds true with asset allocation and rate of return. The more aggressive the allocation is, the higher the average rate of return will be, and thus, the money will grow faster and require a smaller amount of savings. Exactly what opposing counsel wants in order to keep more assets and income for their client.

Not to be left out, will be questions about Social Security, retirement age, and inflation. All arbitrary factors with multiple answers. Inflation tends to be one of the trickier ones since the government will argue that historical inflation comes in around 2-3%. The only problem is, they seem to change the way inflation is calculated every couple of years. Furthermore, every day items like food and energy aren’t always included in those calculations yet can represent the greatest threat to purchasing power. This is also evident with health costs, specifically health care premiums and prescription drug costs which can jump by 10% or more in any year.

Overall, defending a retirement plan in court can be quite the game of cat and mouse. However, for new and soon-to-be retirees, it can serve as a good opportunity to understand what does and doesn’t go into a retirement plan and allow them to be better prepared to make the transition from work life to home life.

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