Libertiny Group--Blog: Personal Investing: Long Term Care—Helping to Preserve Your Independence

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Personal Investing: Long Term Care—Helping to Preserve Your Independence

2008 October 13

Historically, the “extended” family handled all long-term care issues for their parents during their golden years. Large families coupled with the co-location of adult children ensured that parents and grandparents were well cared for both during their daily activities as well as financially.

Today, families have fewer children and those children are finding jobs, spouses, and homes throughout the world. This has lead to the issue of more parents and grandparents having to provide qualified care and financial resources for themselves.

Budget

Our Simple Budget software package (Click HERE) helps to identify your cash outflows during your working life time and can also be used to project your cash outflows as you retire and reach the age where medical care becomes an important part of your lives.

Nearly a decade ago in 1999 the Wall Street Journal estimated that 25% of Americans over age 65 are expected to spend at least a year in a nursing home during their lives¹. The U.S. Department of Health and Human Services CDC, estimates that a nursing home’s average cost in 2002 will be $57,600 per year and could exceed $100,000 per year in some parts of the country². The second part of care expenses arise from the costs associated with care given outside of traditional nursing homes. A study based on the Medicare Current Beneficiary Survey found that the annual cost was $6,800 for those people that started and ended the year with a disability and $3,400 for those people who developed a disability during the year³.

Add to these figures, the everyday costs such as food, medication, and the majority of expenses that you’ve listed in your copy of our Simple Budget software, and the cash outflow required for a comfortable life could outstrip cash inflows generated by pensions and investments.

Tip

Medicare continues to have strict eligibility requirements and Medicaid does not cover any long-term care. Medicaid is designed for the poor. In essence, a person with assets must spend nearly all of their money prior to becoming eligible.

Sample Cost Analysis

Important Note: The following is an illustration. Your actual requirements will likely be different. We strongly urge you to talk with your financial advisor before making any decisions about long term care or purchasing any long term care products, including insurance.

Let’s assume that you retire at the age of 65 and live to age 80. Therefore, your assets (investments, retirement plan, social security) must fund 15 years of retirement. Further, let’s assume that your family spends $100,000 per year ($8,333 per month) on expenses including taxes. With 0% inflation, simple math tells us that you’ll need $1.5million in retirement assets to pay for your retirement. Add 4% average annual inflation and this figure jumps to $2million (For reference, the average Consumer Price Index—CPI—from 1977-1999 was 4.8%⁴).

Now let’s add in the cost of the average nursing home ($57,600 per year) for a period of 2 years and 3 years of assisted living and adjust the total for 4% inflation. The total is $222,000, which is in addition to the $2million originally needed for retirement—a significant percentage of your retirement assets.

Solutions

As the usage of medical services and facilities increase during retirement, it’s clear that the cash flow burden could outstrip your available assets. What is the solution?

The answer depends on how much you spend during your retirement. If you have a substantial financial cushion (approximately 2X expected spending), then you may be able to “self insure” yourself through the depletion of your assets. On the other hand, if you fall under this range, then Long Term Care insurance could be the solution for you. As with all insurance products, there are conditions that will disqualify you from obtaining this Long Term Care insurance.

With over 120 companies selling Long Term Care insurance⁵ three things are important when reviewing insurance policies:

1) Company

2) Service

3) Policy

Most folks look at the policy and fees first. While both are important, the key issue is to have a solid business with a high quality history backing your policy. The company that you choose needs to be in business, servicing your needs in the future, not just today. This issue is more important than ever with the continuing problems of unlicensed insurance businesses.

Here are the key benefits for completing a budget for your retirement year and deciding how you will fund your long term care needs:

1) Help preserve independence

2) Help to protect income and assets

3) Quality of care choices

Bottom Line

Projecting your future cash flow needs in a proper planning document is as important today as it will be during your retirement. Planning allows you to determine if you’re able to self-finance your retirement or if you have a need for a financial product such as long term care insurance. Your independent financial advisor can answer these questions for you and help you to live a high quality life during your retirement.

Sources

¹Wall Street Journal, 31 March 1999.

²“Health.” United States Department of Health and Human Services CDC, compiled by ElderWeb, 2001.

³“Medical and Long-Term Care Costs When Older Persons Become More Dependent.” American Journal of Public Health, August 2002.

⁴“How Much Do Nursing Homes Charge?” ElderWeb, 21 August 2002.

⁵“LTC Planning, A Dollar & Sense Guide.” United Seniors Health Cooperative, May 1999

Reference

“Long-Term Care Crises Are Beginning to Loom.” Wall Street Journal, 13 August 2002.

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