Contingent Planning Report

When I run a report with contingent planning activated I don't see any difference compared to the report with contingent planning deactivated. My wife & I are both retired in our late 70s. I have entered special expenses for each of us for the remaing years but under the contingent tab I deleted those expenses. However, the report still shows all those special expense totals for each year. If I run a survior report I do see differences but then I have to pick a year of death. The benefit of running a contingent report was not having to guess when you'd die.
I'd appreciate if you can help me understand contingent Planning.
Thanks
James

Comments

James, I'm just a user.

I think what you observe is the design. You're basically checking different potential ages of death to determine if some contingent actions (e.g., downsizing primary residence, buying an annuity) is worthwhile. I use it to test things like "if I die, my wife will sell my Lamborghini and Maserati" to see the benefit of that action for her.

It also reveals which of the survivors has an increase in standard of living, if that's the case. That's probably whoever shows the higher suggested life insurance. The life insurance is enough to maintain the status quo for the survivor during the period when insurance is suggested. If the person with the policy on them is the survivor, you'll probably see their LSPA go up.

Chris, My reports do not show any required life insurance under contingent planning and we don't need it otherwise. Also there was only a few dollars less discretionary spending between the two reports, with & without contingent planning activated. I'm clearly missing something either in data inputs or how to read the report which looks the same as without contingent planning.
Does a run with contingent planning active simply determine how much life insurance is required to maintain the same std. of living? If the program determines that no life insurance is needed then I'd expect the report to be the same as a report run with contingent planning disabled. Is that a correct assumption?
James

James, I didn't mean to imply that you'd see life insurance in the contingent plans. It's in the main suggestions report and you don't need contingent planning to do that. ESP calculates the level of live insurance needed to assure that the survivor enjoys standard of living that reflects the regular LSPA, at a minimum. Once one of you dies, there's no longer a need to have insurance for the benefit of the other.

Contingent reports provide value only if you set the age of death to something earlier than the age in the main plan. E.g., in our plan we both live to 100. For contingent testing you set those ages earlier, such as both of you at age 75. Your spouse/partner's contingent report reflects their life if you die when they're 75. Your report reflects your life if your partner dies when you're 75.

I just ran my survivor reports as a reminder while writing this answer. Because we have little in the way of taxable ("regular") investments, there are years where the regular withdrawal plan doesn't match the survivor's income needs. Both require adjustments to contingent retirement account special withdrawals to smooth out cash flow through our respective lives. Once I did that to level out income, one of us is likely to have a somewhat better standard of living but both would be at least as good as if both of us survived.

If you enable contingent reports, ESP copies aspects of the standard plan to the each survivor's contingent plan, for the topics you check. After you do that you're presented with a copy of things like retirement contributions, special withdrawals, expenses, receipts, etc. You can edit those to reflect what the survivor would do differently if their partner dies.

To see the effects at different potential ages of death, you have to change the ages each time you run a report. Alternatively, you can keep the ages static while making changes in the contingent subjects (e.g., contributions, withdrawals, etc.) to view the effect of those changes on the survivor. It's very much an iterative process but the information helps you determine if the survivor would be okay.

"The benefit of running a contingent report was not having to guess when you'd die."

Contingent reports are a snapshot in time. You get to see the effects for only one age of each survivor, per report run. You're not guessing when you'll die. The benefit of running a contingent report is to see the effect on the survivor if one of you did die at a given age and, perhaps, that survivor took different actions than if both survived.

If you follow the life insurance suggestion you can be assured that the surviving spouse enjoys a standard of living at least as good as if both survived. In that sense, you don't need contingent reports. The survivor may have to vary how and when they take certain financial actions, such as retirement withdrawals, but if they do, their LSPA will be at least as good.

Note - this does not mean they'll have the same income or discretionary spending. It does mean they'll have the same living standard per adult, which is the statistic ESP uses in calculating the necessary withdrawals.

Chris,
Thank you for your insight. Lets see if I understand what you've articulated.
By activating contingent planning you define how income and expenses change when one of you dies. ESP then uses that contingent information in its analysis but you have to pick a date when one of you dies earlier than your base line life expectance. So, you need to run a survivor report to see the affect. I ran two identical profiles except one had contingent planning active with all the income/expense changes that would change if either of us dies between now and age 100. The survivor report showed a higer std of living when contingent planning was active.
Thanks
James

James, the higher standard of living in the survivor report reflects the fact that the survivor has all of the assets to themselves. If other income streams are involved, e.g., SS, annuities or pensions, those income streams stop or change and the survivor's income will change. That's why ESP recommends life insurance, to mitigate those effects.

If one of you is getting a lot of pension income that changes when you die, check out the living standard of the survivor. You may see that it is lower than if the other was the survivor but it should never be lower than the LSPA where both are alive, if no other changes are made.

dan royer's picture

Chris spot on with all this. Thanks Chris! I think of contingency planning as a way to make life insurance recommendations more realistic. So if it's recommending 400K of life insurance at age 70 I might think to myself, "hey, that might be true, but my wife would sell this house and move to a cheaper home' and if that's the case, all this life insurance might not be needed.' Turns out, this eliminates life insurance altogether. What if a spouse goes back to work when the other dies? This can impact the need for life insurance a great deal. What if the opposite and someone needs to quit work to take care of kids when the other dies, that can impact insurance needs a lot. So I can test these hypotheses in contingent planning. This is like Chris's car example.

Dan, Every time I run a contingent planning report I have to once more delete all the special expenses that go away when each of us dies and reselect the contingent inputs that stay the same as their regular inputs. Not a big issue but I wonder is that the way the program is designed? I expect that would be the case if I close ESP but not when the program is open and all I'm doing is changing the ages at which each survivor report starts. Can you please clarify.
Thanks,
Sorry. I found it was my error. When I click on the Contingent Planning tab, I noticed that the inputs that I wanted to set as equal to their regular counterparts were not selected. Clicking on "Check All/Copy" resets ever item to its regular counterpart as expected. My error!
James

dan royer's picture

Oh, good.