Broke at 80. What You Don’t Know About Long Term Care Can Hurt You, and Probably Will.
Remember the movie Saturday Night Live? There is a moment where the main character Tony, played by John Travolta, is being told by his boss he needs to think about the future. Tony immediately tells him “Screw the future.” The boss, who has some understanding of life, replies “No Tony, you can’t screw the future, the future screws you.”
When it comes to dealing with long term health expenses, it would be hard to find a more accurate statement. Health inflation in this country has averaged 3.7% per year over the last 10 years. This doesn’t seem too bad until you realize that over the same period inflation has been below 2%, and wage inflation (meaning how fast your paycheck has grown) has only clocked about 0.7% a year over the same period.
A little added perspective: this means that after 10 years of “wage growth” the $1 you earned in 2005 has only grown to $1.07, while the $1 you spent for healthcare in 2005 now costs you $1.44 for the same type benefits. In simplified terms, your total income has increased 7%, but your healthcare costs have increased by 44%.
This makes for long term financial disaster if you don’t have a plan to protect yourself from these costs.
So, what are the choices?
Many people count on Medicare or Medicare supplements to address these issues, but the simple fact is that neither pays for situations where you may need permanent in-home care, an assisted living facility, or a nursing home, which are substantial costs even today. Medicare benefits are limited, and very likely will be even more limited in the future due to our government’s excessive spending habits.
The reality is that most people are going to need adult day care, in-home care, an assisted living facility, or a nursing home. The only question is whether it’s going to hit you in your 60’s, 70’s or 80’s, but it’s coming. That’s reality. If neither you nor your children are able to cover the expense when the time comes, there are government run facilities you that will probably accept you.
Imagine the helpful government employees at the DMV or IRS preparing your food, helping you dress, managing your prescriptions and making sure you have everything you need when you aren’t able to handle it yourself. Good times, right?
If that isn’t part of the future you imagine for yourself or your spouse, then you need to deal with the problem before the problem deals with you.
There are options.
The least expensive way may be with a 30 year term life policy. Here is a link for an earlier article I wrote on this subject. CLICK HERE
The next most cost effective solution is a long term care policy (“LTC”).
Long term care policies are a viable solution if extended term life plans don’t appeal, or if you need added coverage above what you can get from a well designed term life policy. Many long term care policies feature an annualized cost of care adjustment designed to keep up with expenses. The benefit of this cannot be underestimated, especially in a future that is probably going to continue to experience flat wage inflation. Find a policy with some kind of cost of care rider to keep up with the rising expenses.
Many long term care sales agents will try to sell you a whole life or variable life policy with a long term care benefit. Don’t bite. These earn big commissions for the agent, are expensive, and draw money away from both better investments and the primary problem which is fixing your long term care situation.
Another mistake made when purchasing long term care coverage is not getting enough. Many people fixate on the face value of the policy and assume it will be enough. After all, a $200,000 or $300,000 long term care policy will cover just about everything, right?
Not likely. When you buy a long term care policy with a benefit of $300,000 you are basically making a bet that you will either (1) die after about 4 and half years of assisted living (unlikely) or (2) that you will be miraculously cured of the infirmities that made you decide on an assisted living facility shortly after your $300,000 runs out (3) that your portfolio can sustain the additional draw down to pay for the facility on top of your other living expenses from 4 years and 7 months on. Number 3 might make sense for some people, but what if you live longer than you expect to? Many do, and more in the future will.
Shouldn’t you know if option 3 is going to work for you? If you don’t, time to get financial plan that includes managing this expense.
Let’s look at actual costs for in-home care, assisted living, and a nursing home;
Home Health Care: $45,760 a year. That’s the national average. It could be substantially higher where you live. Think about this as $3,813 a month that Medicare won’t pay if you need it. Where are you going to get that money?
Home Health Care is generally defined as assistance with a range of tasks that you aren’t able to handle any longer like housekeeping, errands, bathing, handling medications, etc. If you think you will only need two hours a day and can manage costs that way, you are probably wrong.
Assisted Living Facility: $43,200 a year, usually per person. Again, this is the national average and your costs could be substantially higher (probably are) but are not as likely to be substantially lower. If you are married, you could be on the hook for $7,200 a month (or more). Most people don’t have retirement accounts that can sustain that kind of draw down added on top of their other expenses, at least not for very long.
Nursing Home Care: Private room: $91,250 a year is the national average. This category also experiences the highest annual inflation of the above options at around 4% per year over the last 5 years. $7,604 a month. What happens if you have a spouse and you both need this type care?
When you need one of the above, and you most likely will, what happens if you live 5 or even 10 years longer than you expect? For most people, that means your last years may be a struggle just to get by, or even a situation where you are forced back to work of some kind or have to move to a government facility.
Now, consider this: Since 1950 the average American lifespan has increased from about 64 to 82. Medical technology and lifestyle choices have accelerated the potential increases in lifespan in recent years and there are too many scientists to cite that believe many people in their 50’s today will see their 90th or even 95th birthday. It seems a bit irresponsible to risk your happiness in your last years or your children’s legacy on the idea that you will die before you need the care that comes with aging just to save a few thousand dollars a year, which is about what long term care policies cost.
Depending on your age and health, you could obtain a long term care policies with $800,000 in benefits (or 10 + years of coverage) for an annual cost equivalent to about what 45 days stay in a nursing home would cost. When you are discussing policies with an agent, try to find a policy with an inflation or cost-of-living adjustment of some kind, and also try to find the longest benefit term possible. It isn’t helpful to have a million dollar policy with a benefit period of 1 year. Look for 4 or 5 year benefit terms, and stack policies if you can.
It’s also important to make sure that the policy you buy plays nice with other policies if you have them. It would be bad to pay on a policy for a few years and then find out it won’t pay benefits because of the other LTC policy you own. Then you get to spend your time trying to get your premiums back instead of relaxing by the pool or playing golf.
So when should you start getting long term care policies in place?
Americans are experiencing healthy aging in greater numbers than ever before, but once you start passing out of middle age the likelihood of problems increases with your years. My opinion is that you should have your long term care policies in place a couple years before retirement, and perhaps even earlier.
Will this cost you money that could have been used elsewhere for lifestyle or investment? Sure. But you need to find a way to protect yourself from potentially massive financial stress later in life when you are least able to handle it. For many, this is going to involve finding a balance between the costs of a LTC policy(s) and the needs of today.
Wherever that balance is, it’s better to identify it now before you find yourself at 83 years old writing checks for $7000 a month that you didn’t see coming.
It’s also best not to work this out in a vacuum. Talk to your financial advisor, not just your insurance agent. Also, ask your financial advisor if they have a fiduciary responsibility to you. If they don’t, find an advisor that does to help you build a financial life plan that includes addressing your long term health needs.
For those that don’t know, my firm and I are fiduciary advisors.
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To Smarter Investing (and smarter planning),
Chief Market Strategist
ACI Wealth Advisors, LLC.