Hey guys, Mike Frontera here back with another edition of retirement theory. You know, there are few things scarier to most of us than spending our last years fading away in some nursing home. We’ve probably all had loved ones in that situation and it can be truly be a heart-breaking thing to experience.
What makes the thought of such a thing happening to us even worse, is the financial devastation that a long stay in one of these facilities can bring. Nobody sacrifices their whole lives squirreling away money, decade after decade, in the hopes of someday blowing through it all in a few years at a nursing home.
This nightmare of such a scenario is often brought up by a financial planner or an elder law attorney, or even brought up by a client themselves, scared about living through what one of their parents perhaps went through. And what is often recommended as planning measures basically consists of setting up a trust to “hide” assets from Medicaid or buying long-term care insurance. The problem with both of those measures is that the doing either of them often requires a great deal of sacrifice themselves. A “Medicaid Trust” might put too many restrictions on your assets, or simply cannot be done, and obtaining long-term care insurance can be exorbitantly expensive. So most people just throw up their hands and say forget it, I’ll do nothing.
Planning for Long-Term Care
The good news is that planning for long-term care doesn’t have to be so horrible. The statistics bear out in fact, that most people in fact do not go through their life savings during a long-term care scenario. Is there is a risk of catastrophic portfolio depletion? Yes. But it might be smaller than you think.
Let’s take a closer look at the risk of needing long-term care for an extended period of time, and some ways to reduce that risk in a sensible way. And since we’re speaking so much about long-term care, let’s get on the same page of what it actually is. Paraphrasing the US Dept of Health & Human Services1, long-term care is non-medical care associated with the basic tasks of our everyday life or “Activities of Daily Living”. Those Activities of Daily Living (or ADLs) are often listed by insurance companies as things you must need help with in order to make a claim on your long term care insurance. Those ADLs include:
Using the Toilet
Transferring (getting from point A to point B)
I know, not too fun to think about. And of course the other piece that could require someone to need long term care would be a cognitive impairment, like having Alzheimer’s Disease.
Will You Need Long-Term Care?
OK, so statistically speaking what are the odds that you’ll find yourself needing long term care? Well according to Genworth’s 2015 cost of care survey2, 70% of us over age 65 will need some form of care during our lifetimes. Wow, that’s a huge number! That big number (roughly) is one used very often by insurance companies when they try to sell long term care insurance.
AARP has the number a bit lower. Their public policy institute in May of 2017 says that 52% of us 65 and older will need care at some point. But even that number includes the care that many of us would receive at home, either by family or someone that is hired to come in.
If we look strictly at the odds of going to an assisted living facility or nursing home, the odds go more in our favor. The US Dept of Health & Human Services states that the percentage of us needing any kind of care in a facility is about 37%. And the length of the average stay in one of those facilities for those that need it is only 1 year. So it seems like most of us may be lucky enough to avoid the financially devastating impact of long-term care. But of course the risk is still there.
AARP notes that 10% of men and 18% of women needing long-term care will need it for five years or longer. However this might be a bit confusing because they do not specifically say “nursing home” stay for five years or more. This is important. Again, some of that might still be home care. And a nursing home is where the real big money is spent. Research firm Morningstar noted a study done in 2014 by Boston College in which care specifically received in a nursing home was analyzed.
There they concluded that 22% of men and 36% of women need more than 1 year of nursing home care but that only 2% of men and 7% of women may need 5 or more years in a nursing home. That’s still a risk but it does seem a lot less likely than the catch-all 70% number that is often given. Still- for that unlucky portion of us that need that most expensive care for that long, it can be financially devastating.
So what are a few ways we can plan for this risk in a smart way. The first thing is that without any sophisticated planning techniques you can still protect yourself somewhat. Are you re-locating in retirement? Research the cost of nursing homes in the states and areas that you’re considering moving to. A huge aspect of cost just depends on where you get your care.
In New York for example, the average cost of a private room in a nursing home is about $140,000 per year5. In Oklahoma though, a private room averages only about $63,000 per year. Less than half. Even within the same or neighboring state, you will likely find very large swings in cost.
Also, be sure to stress-test this long-term care risk in the context of your financial plan. What can your portfolio handle as an unanticipated expense? How long could you draw an extra $70-100k before it destroys your plan? With that information in mind, re-visit ways to cover the more catastrophic, but less likely, risk of an extended care scenario.
Long-term care insurance policy’s cost is highly driven by the elimination period (or waiting period) before benefits are paid. If you’re able to cover yourself for a short-term care situation, you can likely save a lot on premiums by pushing out the waiting period. You can also look into getting a policy that provides SOME coverage, rather than seeking one out that covers 100% of those expenses. That lighter amount of protection may be all you need to take some of that burden off of your portfolio from carrying all your care expenses.
It may also be worthwhile to investigate the use of a life insurance policy as an alternative to long-term care. A death benefit can go a long way to replace what might've been spent down during a time of long-term care. And a permanent life insurance policy may remove your distaste for paying for something that may never get used. In fact, there are many “hybrid” policies that have become very popular as long-term care planning tools as well. These combine features of both life and long-term care insurance in a way that may help control your costs and provide benefits when you need them most.
So, do you have questions for me? Let me know! Give me a call at (518) 469-8152, or just visit me at www.retirementtheory.com. Do you follow me on Facebook? I think that you should! You’ll see videos like these, and get blog and article shares on everything retirement planning. Once again, thank you for joining me. See you next time.