R101 #11 - Long-Term Care Can Derail Retirement
There’s a saying about the best laid plans… No matter how good your retirement plan is, unexpected expenses can blow it up. Regardless of how careful you are about navigating the risks of the market and planning for a long life, what are you going to do when you can’t take care of yourself?
I get it. This isn’t a subject that people feel comfortable talking about. Not only do they not want to confront their mortality, they don’t want to imagine a life where they are cognitively or physically impaired enough to need someone to care for them. But the reality is that longer life expectancies mean a higher chance that the finals years of your life will not be spent in good health. If you don’t think about this and plan for it now, you may become a burden on family and friends. You owe it to them to make this a part of your retirement plan.
And I’m going to say this again for the people who didn’t read my last post - MEDICARE DOES NOT PAY FOR LONG TERM CARE. Medicare may pay for skilled care for short periods of time following an acute medical situation. That’s not what Long-Term Care is.
What Does Long-Term Care (LTC) Actually Mean?
As you age, it becomes more and more difficult to accomplish all of the tasks needed to take care of yourself mentally and physically. There can be the obvious issues of not being able to bathe or dress yourself, but what about loneliness and social isolation? What about not being able to clean your house or handle your personal finances?
For many aging adults, assistance with some of these tasks are usually handled at first by friends or family members. There can also be community services that can help with meal delivery and transportation. You can make modifications to your residence that can allow you to be more comfortable and safe in your own home.
At some point it’s not enough.
There is a continuum of options for assistance with these more serious needs. You can hire individuals to come into your home to help with homemaker services. There are community centers or adult day care centers you can spend your days at, that can help with meals and combat isolation. Further along the continuum are options such as in-home healthcare, assisted living facilities, and then nursing homes. Many people may spend their final period of life under hospice care.
I really recommend researching all of the options in your community before you need it. There’s nothing worse than scrambling with your family members to find care at the last minute.
How Much Long-Term Care Costs
It’s important to know how much different options cost along the continuum of care. The best place I’ve found to research this is the Genworth Cost of Care website. You can enter your location, the period of time to estimate, and the inflation rate to assume for years into the future. Care costs are expected to rise at a rate higher than regular inflation, so you can model what that looks like.
Now that you’ve checked that out - take a deep breath.
Costs vary a lot across different areas of the country. There can be benefits to choosing a lower cost location, but that shouldn’t be the only criteria. Proximity to family and friends can make a big difference in quality of life in those final years.
How Can You Plan for Long-Term Care
The first step in planning for LTC is recognizing the likelihood of needing it and the magnitude of the need. The downside to longevity is that you’re more likely to need care the longer you live. Your family history of health issues may increase your likelihood. The reality is also that women are more likely to need care than men, they need it for longer periods of time, and they usually have less resources to pay for it.
The majority of people never need paid long term care. Somewhere around 20% will need it for more than one year. When I’m working with clients, we typically look at various scenarios to determine the impact on their plan. We’re looking at anywhere from $100,000 to $400,000 of extra expenses over the last couple of years of life.
There are four basic ways to fund long-term care costs.
Medicaid - this is the most common option in the United States. It is usually the last-resort option for those without sufficient resources to pay in any other way. States have various rules to qualify for Medicaid coverage. It may be possible to do “Medicaid Planning” which should encompass the guidance of an experienced elder care attorney in your state and is beyond the scope of this post. What you need to know is that even if you qualify for Medicaid, you may not be able to get the care you need if there isn’t availability in a covered facility, and the care you do get may be lower quality.
Traditional Long-Term Care Insurance (LTCI) policies - these policies are not very common in practice, but they are important to understand. This type of insurance involves paying an ongoing premium for coverage until a qualifying event happens that triggers payout under the plan. The sweet spot for purchasing this type of insurance is usually in your 50s - it’s a trade-off between being healthy enough to qualify and paying premiums for many years when your risk is low. The basic idea is that you are paying for coverage of a certain amount per day or other time period, coverage can include both spouses in a couple, and there may be maximum benefits allowed. Premiums can adjust year by year. Early policies were not priced appropriately and people ended up not being able to afford the premium increases over time. Lots of insurance companies stopped offering the policies because they weren’t profitable.
Hybrid Insurance Policies - because of the downsides of traditional policies, new products that provide a combination of LTC insurance and life insurance have become more popular. The two main types of policies either function as life insurance first with some riders that allow acceleration of benefits to pay for long-term care, or policies that function as long-term care first and allow extension of benefits beyond just the value of the life insurance. The benefit to these types of policies is that the underwriting may be less restrictive than traditional LTCI, the premium costs can be locked in, and there can be a return of part of the premium as a death benefit or earlier if the contract is canceled. It’s worth exploring if this type of policy may be of interest to you. As with all insurance policies, however, you’ll need to understand the fine print and compare your options. It’s important to know how much time needs to pass before benefits start (waiting period), how much benefit is provided per period (monthly, daily, or total), how long are benefits provided, if there is a maximum on the coverage, if there is inflation protection, how are benefits paid (reimbursement v. indemnity), what expenses qualify, and if there are other restrictions worth understanding.
Self-funding Long-Term Care - this strategy places all of the risk of funding on you, and results vary. If you don’t need LTC, you (or your heirs) win. You didn’t spend any money or do any Medicaid planning to qualify. It can also be the most risky in that the amount of funds you need to dedicate to covering this risk can be substantial. Care can be funded through a variety of resources like investments, cash value life insurance policies, longevity annuities, and/or home equity. Many times retirees with a paid-off home inadvertently plan to pay with home equity if they fail to plan because the home may need to be sold to cover care. Obviously, risk tolerance plays a huge role in choosing this route. Those with lower risk tolerance may prefer the insurance coverage that pools the risk. The MOST important thing to think about with this options is the impact it has on others. When it comes time to pay for care, you may not want to pay, and therefore you may have to rely more greatly on family care. You may feel guilty for “spending your heirs’ inheritance” to pay for care. Family members may also argue about how to pay for care - especially in blended family situations. Having an insurance policy can make sense in these situations, even for those who can afford to self-fund.
Regardless of which option you choose, you need to make a plan. Then you need to write it down and communicate it to family members who will need to implement it if you become impaired. You can also involve professionals that can answer questions and coordinate care. Don’t leave this to chance.
I mentioned that some people who fail to plan, end up using home equity to pay for care. The next post covers housing decisions in retirement.
