Life’s Black Swans

Who, better than you, knows the truth of the adage “an ounce of prevention is worth a pound of cure?” If only you could get your patients to live a more healthful lifestyle, wouldn’t their life, and yours, be better? We financial planners experience much the same phenomena when clients fail to plan for “Black Swan” events. Black Swan events are those that have a relatively low probability of occurrence, but staggering consequences if they do materialize.

This happened recently when a 32-year-old client, single mother of a toddler, developed a debilitating form of cancer. It’s no fun to think about planning for such an event at 65 and it’s very easy to totally dismiss the thought for a vibrant 30-something. That is until she cannot go to work or pick up her baby. Worlds do fall apart.

We had a similar planning conversation recently with a retired couple. They were both quite healthy, but he still welcomed the opportunity to plan for a worst-case scenario. She said, “Let’s deal with that when the time comes.” Knowing that he has a family history with dementia, I made a note that we will have to work on this in future meetings.

Most of you, as doctors, have seen enough of these situations to know how quickly things fall apart for entire families when you must deliver such a diagnosis. Some cope and adapt much better than others. Having a plan in place to deal with remote risk can significantly reduce the chaos should the unthinkable happen. I call these life’s predictable predicaments. They should be addressed with contingency planning.

“The real cause of volatility is pricing model uncertainty … the inability to determine the true value of an investment.”— Scott Neal

Whether you are early-career or elderly, there are three areas that should be addressed in every life plan: housing, coordinating healthcare, and financing.

Housing

Some people think that it is enough to simply select a house with a first-floor master suite and doors wide enough for a wheel chair to get through. Do you really think that such thought ever enters the mind of a first-time homebuyer? It was not a consideration for our 32 year old.

Knowing that we want to age-in-place, my family shopped for that kind of house. Internet search turned up many possibilities, but we fell in love with and bought one with 5 steps to get in at any entrance. To rationalize the purchase while recognizing the impediment that those five steps present, my plan for my own incapacity is to replace the wooden steps leading from garage to kitchen with a chair lift so that I can roll into the kitchen. That impacts the financial plan. I had to go find the price of a chair lift.

How many 30-year olds do you know who live in a house with a first-floor master suite? If incapacity hits, does he or she move back in with parents or siblings? Has that been communicated? Do they turn the living room into a bedroom? Do they have space for a round-the-clock caregiver?

Healthcare

If you have been in practice very long, I am sure that you have been placed in the middle of family members expressing competing views over what is best for their loved one. You know what is best, and while one faction may agree with you, others disagree. Chaos ensues. This becomes exacerbated when dealing with blended families.

As planners, we ask clients to consider these things and to name a health care surrogate with a valid healthcare power of attorney, should they become unable to speak for themselves or lack decisional capacity. We don’t stop there. We lead them to develop a family communication plan to let all the stakeholders know who is to be the coordinator of healthcare. If the patient has a power of attorney with co-appointees, as their physician, you need to know whether the POA can act independently or if they must jointly agree on a proposed treatment.

Financial

Financial planning standards have long focused on identifying the client’s goals and developing plans for moving toward the accomplishment of those goals and objectives. In my 35+ years of practice, I must say that I have never had anyone whose goal was to become debilitated or dependent upon someone else. So, the issue has been reduced to one of risk management, and the sole recommendation is typically to buy disability or life insurance to replace income. The practicalities of dealing with the predictable predicaments presented by Black Swan events simply never get addressed in most financial plans. We think this is a shortcoming of our profession and have willingly chosen to address these issues by asking hard questions.

“If you fail to raise these questions, the best-laid financial plans can easily be thwarted.”— Scott Neal

Once again, having the right documents in place, e.g., a financial power of attorney, and holding the conversations with the right family members, is paramount to reducing the chaos brought on by sudden catastrophes.

Hopefully, you can see that if you fail to raise these questions, the best-laid financial plan can easily be thwarted. By raising them long before they are ever needed and keeping the plan up-to-date and fully communicated, stress is reduced and clearer thinking prevails. Having such plans in place can make my job, and yours, easier in the long run.

Scott Neal is president of D. Scott Neal, Inc. a fee-only financial planning and investment advisory firm with offices in Lexington and Louisville. He is also the founder of CaregiversCircle.com, a place for caregivers to find support and help in making decisions for loved ones. Reach him via email scott@dsneal.com