“Shady Pines, Ma!” – Dorothy Zbornak
Financial advisors and their clients have one goal they can always agree on – a client shouldn’t outlive their nest egg. Long-term care insurance (LTCI) may well be one of the best known tools for preventing such a scary outcome, yet nearly every conversation I have with clients about long-term care ends with a hard pass. Here’s why people are opting out and some alternative, non-insurance ways people are planning for their LTC needs.
Naturally, there are situations where one could easily spend down all their wealth and have to rely on loved ones or Government (Medicaid) for nursing care or financial help. For example, a person who has a stroke and needs 24-hour care for 10 years could see their cumulative care costs enter seven-figure territory and wipe out most of their portfolio. This is the scenario we are asked to imagine when pondering the purchase of a LTCI policy.
If it’s a high priority to pass your wealth along to someone else at your death, LTCI may be just the ticket. But if your primary goal is to maintain your quality of life without regard to the size of your nest egg when you die, here are a few ways to approach your LTC concerns that don’t involve buying an insurance policy.
Shorter Life, Less Spending
We tend to shorten our life spans once we raid our portfolios for a significant LTC event. Imagine you have a $2M nest egg by the age of 70 and you’re drawing about $100,000 per year. What happens if you have a long-term care event (Alzheimer’s, stroke, heart attack, etc.) requiring you to spend an additional $400,000 between ages 85 and 90? To compound this, let’s imagine the markets perform below expectations between your 70th and 85th birthdays, leaving you with a nest egg balance of $1M at the age of 85.
You might start worrying you’ll eventually run out of money if your nest egg balance gets so low that you’re taking out 10% to 15% of the balance just to cover your primary expenses. But the odds of living to age 100 drop for people who experience a significant long-term care (LTC) event, especially for stroke victims. Alzheimer’s patients typically live between 3 to 11 years after diagnosis, according to the Mayo Clinic. If market performance from that point simply kept pace with inflation, you’d still have 12 years of spending runway on that $1.2M nest egg ($1.2M / $100,000).
If you own a home as you enter your 80s, you’ll probably have a sizable amount of equity or no mortgage at all. Unless you’ve prioritized spoiling an heir over taking care of your own health needs, you can tap that equity at the time you need LTC help (i.e. sell your home, cash-out refinance, or reverse mortgage).
If you have a financially self-sufficient child who will inherit the house, talk to them and explore options. For example, if you don’t want to sell or borrow against a house they will eventually inherit, see if they can help you cover the LTC costs. They’ll get it back in the form of more equity when you die. Selling a home late in life may create significant taxes that would otherwise evaporate if that home was passed along to an heir at your death.
Health Savings Accounts (HSAs)
If you contribute to a health savings account (HSA) as part of your medical insurance plan, and if you can afford it, pay for medical costs out of pocket not from your HSA. View this account as a type of IRA for future medical costs. You’ll get tax-deferred growth on the HSA and your withdrawals will most likely be tax free (since you’re using them for care-related expenses).
Your HSA balance may not be large enough to cover all of it, but it could make a healthy dent. For example, if a single 40-year old added the maximum contribution to an HSA and earned a 6 to 7% annualized return, there would be around $300,000 waiting at age 70 to assist with LTC costs. Full disclosure – this is my current plan of attack. I defer from every paycheck so that I hit the maximum each year (in 2021, that’s $3,600 for a single person). The contributions then get moved to an HSA investment account.
Relocating to another city can greatly reduce your LTC costs, especially if you live in an area where the costs sit at the higher end of the spectrum (I’m talking to you Delaware). If you really need a big price drop, how about moving to Mexico when you’re older? I can think of at least one couple already considering this. According to www.payingforseniorcare.com, one should expect to pay 1/3 to 1/2 of what you’d spend in America for assisted living.
Quality of care may vary in another country, but it does in America as well. If you pursue leaving the country, you’ll want to do some research first to understand what level of care you can expect if your situation gets more serious. For example, what if you need help with memory care issues such as Alzheimer’s or dementia? You will also need to rely on your new country’s medical care system for medical benefits as your Medicare benefits won’t transfer to another country.
Staying Home Longer
A friend of mine who works in the assisted living industry said he’s found that people are delaying the point at which they move into an assisted living community or nursing home. People are bringing the assistance to them for the small stuff, such as help with shopping and cooking.
There are senior homeshare match-up services that offer room-for-rent exchanges or household assistance. You can either get help from the person directly or use the extra rent income to pay for a professional to come to you. A network of independent nonprofit homesharing programs is available at www.nationalsharedhousing.org.
Technology is also playing a big role in allowing people to age at home and delay having to move into an assisted living community or nursing home. Phone apps can tell seniors when it’s time to take their meds and GPS systems can track their location so others can be alerted when something is wrong. Smart-home devices can offer a connection to family and/or medical professionals 24/7. These include smart plugs with timers, smart lighting, and security cameras.
As additional technological advances arrive, it should get easier for seniors to age in place for an extended period of time, and, ideally, for as long as they wish.
Continuing Care Retirement Communities (CCRC)
Remember on The Golden Girls when Dorothy would pull out the Shady Pines nursing home brochure every time her mom Sophia caused trouble? We all felt her pain at the idea of suddenly losing a community of close friends and being forced into another one of strangers.
This brings us to Continuing Care Retirement Communities (CCRCs), which lets people 60 and over move into a community and grow old with their friends without worrying about future moves if health needs change. As your needs change, you might need to relocate or get your care in another building or level, but you won’t need to leave your community or be separated from your partner.
CCRCs come with various (and sometimes complicated) payment plans where a person without LTCI can pay into a plan for a care level they know they’ll want. here may also be an option to pay a higher contractual amount to protect against rising medical costs. You’ll want to research options carefully.
An Important Exception
The ultra-rich can easily afford to self-insure, meaning the ones most harmed by large LTC costs (sans insurance) often can’t afford it. In my view, there is a sweet spot where it may make sense to buy the insurance: a couple who doesn’t own a home and is relying heavily on their nest egg for lifetime income.
Let’s say that Tony and Susan, aged 75 and 70, are renting a great apartment and have a $1M nest egg. Tony has a stroke. They can either hire a LTC nurse, place Tony in a nursing home, or Susan can attempt to play caregiver. Spouses are generally advised not to inhabit the role of a full-time caregiver as it can be emotionally devastating, physically draining, and accelerate health problems due to higher stress levels.
The couple could pay for nursing care out of pocket from their nest egg. But if Tony dies 5 years later and they’ve spent $500,000 on LTC, that leaves Susan with the same rent expense and a portfolio that’s 50% of what it was pre-stroke. Since they don’t own a home, there’s no equity to tap into to assist in this situation. In other words, this puts them in a tough spot with no easy solution. Had they purchased even a modest long-term care insurance (LTCI) policy, they could have focused solely on Tony’s care without having to worry about Susan’s life after Tony dies.
Agents who sell LTCI policies may be chomping at the bit to prove me wrong as they’ve heard way more horror stories involving one’s lack of LTC readiness. There are also new products that have replaced traditional LTCI policies. They seem to like these “hybrid” policies that incorporate LTCI protection with life insurance, but I’m not much of a fan (at least so far, as they are still quite expensive).
Am I suggesting that people simply roll the dice and take their chances? No. Everyone should at least know what a worst-case scenario could do to them financially and emotionally, and then pursue the avenue that makes the most sense for them. Until something better comes along, strategic self-insuring may work just fine for the vast majority of people who worry about what their future nursing costs will (or won’t) be.