Long-Term Care: Do you have a plan?
Like many other issues in life, if you do not have a plan, you are planning to fail. Although we will address the financial aspect of Long-Term Care and how it’s a vital part of the equation, preparing on multiple fronts is necessary for success.
The first non-financial issue should be obvious but never the less is commonly neglected, and that is to be proactive in entering your later years in the best health possible. Being diligent in exercising, having a good diet, and staying active and social should be plan A in managing the golden years. Yes, disease and debilitating conditions can and do hit the healthiest of humans. However, staying active and fit can reduce the necessity and length of time requiring medical assistance in a long-term care setting.
Mental health is also a part of the equation. Getting out, being social, staying active in the community, praying, and attending a local church are all ways to improve mental health; multiple studies have shown they boost physical health as well.
Another broad category in planning for getting older and potentially experiencing a physical and psychological decline is having a solid support network. Knowing what strengths those around you have is helpful if you need help with various tasks. Ideally, having family fill this role effectively is an excellent way to comfortably delay needing formal care or to make long-term care a more comfortable state. Now, let's focus on the financial planning options of the long-term care discussion.
Self-funding is a viable option if you have a net worth of around $4MM and liquid assets of at least $2.5MM. According to Ramsey Solutions, Americans' average long-term care stay is about two years, and the average cost is around $325,000. So even with dementia or a stroke situation that can extend care well past these averages, it would be pretty unlikely to pay much more than $1MM out of pocket for long-term care expenses. So, a wealthy person, especially in good health, entering their 60s, then planning to self-fund is a reasonable option. Not to say that someone is foolish to make other plans for long-term care when 7 out of 10 Americans over 65 will require long-term care, but being a multi-millionaire likely means you won’t have to sell assets to fund this life event. Likely, the only significant financial blow would be to your heirs in the form of reduced inheritance.
An Irrevocable Trust or Gifting Funds
Although these strategies are distinctly different, I lump them together because both are subject to the 5-year look-back rule if someone applies for Medicaid to cover long-term care expenses. So, financially speaking, both strategies could work if someone made it past the 5-year window without needing long-term care. There are multiple downsides to taking either of these approaches. In both instances, you are losing direct control of the funds, so if things change, you will be unlikely to be able to claw the funds back. When you gift property, cash, or securities to a child who eventually gets married but then gets divorced, half of your gifted funds would likely leave the family. Property and funds could get tied up in a lawsuit with which you have nothing to do with. Still, again, your family would lose some of your funds that would not been exposed had you not used a gifting approach to qualify for Medicaid eligibility. If you listen to the Ramsey Show, you know Dave recommends not to do this because if you can afford to cover the cost, you should.
With an irrevocable trust, the risk of losing the funds is not an issue, but decisions and control of the funds are outside your control, which is usually a downside. Putting real estate that you have no current or future intention to sell could be an instance where setting up a trust to protect against long-term care claim exposure could make sense.
Buy Long Term Care Insurance
This may be the best solution for many individuals to protect their assets and maintain control of their current investments. So, even if a couple feels comfortable financially near or at retirement, absorbing even one long-term care event could considerably dampen and hinder the goal of living in retirement with financial freedom.
Going to the other end of the spectrum of the net worth scale, if a couple has a net worth of roughly $300,000 or less, it usually doesn’t make sense to purchase long-term care insurance. An exception may be someone who rents but has a healthy paying pension and around $300,000 in liquid funds; then they may be in a position and choose to pay for a basic policy and still not financially cramp their retirement years.
Most Americans have a net worth between $300,000 and $2M and enough assets that it would be painful to spend down to Medicaid-eligible levels, yet they likely could not afford to pay for long-term care expenses out of pocket. Buying long-term care insurance is likely the best solution for these Americans. Most insurance companies give a “couples discount” for a traditional stand-alone policy for couples in their late 50s; they should expect to pay roughly $400 - $500 a month for at least $70,000 a year of coverage.
Like any other health-related insurance, your age, health, and health history can significantly change your premium. Even if you like the idea of long-term care insurance protecting your assets, you are not guaranteed that you will be offered a policy. According to a study by Ramsey Solutions, 30.4% of Americans aged 60-64 are declined for coverage, so if you find yourself in your late 50s or early 60s and in good health, don’t put off applying for coverage while you still qualify. One complaint about buying such an expensive insurance policy is not to recover any of the premiums, which can easily be $100,000 - $200,000 over a lifetime. You may want to explore utilizing a hybrid policy that combines long-term care insurance with an annuity, life insurance, or both. With these plans, an insured’s family will likely get all of the premium and sometimes even a little bit of growth on the premium amount, assuming they never had a claim.
Summarizing the Long-Term Care Plan in Retirement
Much like Life, Health, and Disability Insurance, you are not excited to think about or be forced to use these coverages, but most of the time, without them, it will eventually be even more painful. So, force yourself to plan and do your homework. Many financial planning topics have universal parallels, but coming up with the exact plan that is best for you is usually nuanced and relatively specific. So, rely on not only friends, family, and personal experience but also pull in your network of advisors, which may include an attorney, an insurance agent, an accountant, your doctor, and, of course, your financial advisor. Usually, going to your financial advisor first to quarterback the process works most efficiently. Remember the big picture of how many years it has taken and how much hard work you have put into building your retirement portfolio and growing your estate. Developing sensible and practical plans to protect those assets makes sense.
If you have questions about long-term care options or are wondering which would be the best plan for you, contact our advisors. They are happy to help and answer any questions you have.