The possibility of long-term care costs financially wiping out a retirement nest egg is not minimal. Estimates of the likelihood of a 65-year-old needing long-term care vary between 35% and 55%, depending upon definitions. Further, the average cost for a semi-private room in a nursing home is about $75,000 a year. Assuming this cost increases by 4% per year, as many experts expect nursing home costs to rise faster than general inflation, the average cost will be $164,300 per year in 20 years, right as a person turning age 65 today will enter the high-incidence years for needing long-term care. With this level of risk and potential cost, the necessity of planning is clear.
This financial planning factor is nothing the baby boom generation is not aware of. According to a recent study conducted by John Hancock, six out of seven people agree that it is irresponsible not to plan for your own long-term care needs. Unfortunately, the issue is not so much awareness but avoidance. Three out of four people who completed the survey state it is difficult to admit they might need long-term care, and the same proportion state that they have so many other concerns that addressing this risk is not a priority.
Medicaid The Answer?
The same John Hancock survey asked respondents who do not have long-term care insurance how they would pay for care if they needed it. The most frequent answer was qualifying for Medicaid. Yet, most experts agree this is a risky strategy because Medicaid programs are already overburdened and will most likely be even more overwhelmed when the wave of boomers reaches the high-incidence years for needing long-term care. Moreover, this solution is not ideal because the options for care under Medicaid are limited and generally not what most people desire.
It’s important for people to realize that the person with the largest financial burden resulting from the need for long-term care is often not the recipient of care, but their spouse. It’s common for a retirement nest egg to be consumed paying for additional health care, leaving no funds for the surviving spouse to live off.
The Value of Planning
Fortunately, the potential financial burden that might come from needing long-term care can be negated with proper planning. Of course, obtaining long-term care insurance can often be an appropriate solution. While this insurance can be extremely expensive (often costing several thousand dollars per year), it can accomplish several key objectives. First, it reduces the need to deplete a nest egg and risk spousal impoverishment. Second, it helps assure more choices and options if care is needed as opposed to being restricted to Medicaid approved places and levels of care. Third, it reduces the chance that people will spend their final years as a burden on their children as they are more likely to be able to afford their own care. Finally, it increases the likelihood that people will be able to pass their assets on to their heirs rather than needing the funds to pay for a nursing home. Be aware that people should research the option of long-term care insurance while they are in their 50s because the cost is lower and their insurability is higher than for people in their 60s.
The other approach is to self-insure. Of course, with this approach individuals choose not to purchase long-term care insurance and hope care is never necessary. An analysis of an individual’s capacity to self-insure can be quite useful. At Net Worth Advisory Group, we perform retirement projections for our clients to determine whether they will be able to maintain their standard of living after leaving the workforce. These projections account for the level of annual spending desired by the client, all sources of income such as Social Security, pensions, and rental income, and consider the retirement nest egg accumulated. To determine a client’s ability to self-insure, we take these retirement projections and add the potential expense of needing five years of long-term care and then determine the standard of living that the surviving spouse could expect in such an event. If both spouses agree that the survivor’s standard of living under these circumstances is acceptable, then the client is likely capable of self-insuring.
There’s no doubt the impact of long-term care can’t be ignored. Determining your ability to self-insure is a great first step in dealing with this issue. Of course, Net Worth Advisory Group delivers this service, so let me know if this is something you’d be interested in. If your financial circumstances don’t afford you the flexibility to self-insure, looking into long-term care insurance options could prove to be a wise long-term investment, and remember, the earlier this is done the more cost effective it may be.