When I think about Part 3 in our series: 5 Ways Retirees Can Protect Their Money During Retirement, Long Term Care insurance (LTCi) is often overlooked by retirees which can pose a serious threat to a retired persons financial well being. Can Long Term Care insurance could protect your retirement savings? Truth is, Long Term Care Insurance (LTCi) is more necessary today than ever because people are living longer, thanks to our health conscience society and of course, the innovations of medical sciences and biotechnology. While the ‘pros’ of living longer are obvious, the ‘con’ is often ignored.
From a personal finance point of view, the living longer means that you will continue to pay taxes, stretch a dollar even further because of inflation and possibly have to pay out of pocket for long term care expenses. Women tend to outlive men, therefore as a group women -especially single or divorced women- should consider obtaining long term care insurance.
According to a Global Health and Aging report entitled, “Living Longer“, published by the National Institute on Aging, “The dramatic increase in average life expectancy during the 20th century ranks as one of society’s greatest achievements. Although most babies born in 1900 did not live past age 50, life expectancy at birth now exceeds 83 years in Japan—the current leader—and is at least 81 years in several other countries.”
Imaging working for 30 years, you are now age 62, retired and sitting living on a retirement savings of $700,000 in an IRA. While you are enjoying retirement you later discover that you or your spouse will need some form of nursing care, either in home care or administered at a full time nursing facility. What you didn’t realize is that the average cost to stay in a nursing home in the U.S. is $76,680 per year, which you might have know if you did not take financial advice from a former co-worker who convinced you not to hire an independent financial advisor.
You were told that “financial advisors charge hefty fees for their advice and service”, including something about ‘how much better off you would be in the long run by working out a retirement financial plan with the 401(K) provider that sold your former employer its retirement plan’ which you participated in for the past 30 years. According to the retirement income analysis that you were given by your employer’s 401(K) plan provider, you would not run out of money as long as the draw down on your 401(K) do not exceed 5% per year, assuming a modest 5% compound growth rate.
Surprise! Now your drawdown will have to increase from $35,000 to $111,680 to cover the cost of “self-insuring” for your unexpected long term care needs.
To make matters worse, having to withdraw an additional $76,680 will kick you into a new tax bracket, from 15% to 25%. Unfortunately, your $700,000 retirement savings, a portion of which you assumed would probably become an inheritance for your children, might not exist beyond seven to ten years. Not only does this place the added burden of needing to achieve a higher rate of return on your retirement funds, but with rewards also comes risk.
Therefore, it isn’t prudent for someone who is retired to expose their portfolio to greater risk in hopes of generating a larger rate of return. In this scenario, the mostly likely option would be to downsize by selling your primary residence (or selling off other tangible assets) in order to diversify your income sources and reduce your tax liability; with a goal of extending the life of your retirement savings.
According to the The American Elder Care Research Organization, on average, senior citizens spends 904 days or 2.47 years in a nursing facility. Therefore, the price tag (not including medication) could be as high as $153,360. As if that price tag doesn’t create enough sticker shock for you, statistically, 1 in 3 senior citizens will enter a nursing home, with women over 65 to men over 65 being more likely to enter a nursing home, at a ratio 1.37 to 1 and 2.1 to 1 for women over 85 compared to men over 85.
Another alarming statistic is that the health care costs for older Americans who earn more than $30,000 a year, is less than the cost for older Americans, earning less than $10,000, or $11,000 to $17,000.
One of the questions that I often get asked is, “when should I begin thinking about purchasing long term care insurance?”
There’s more of an age sweet spot, than a set age when purchasing LTCi makes the most sense. I believe the best time to purchase LTCi is between the age 52 – 60. Unlike life insurance that should be purchased at a younger age, LTCi isn’t something that should be purchased when a person is in their 20’s and 30’s.
Unlike death and taxes which has a 100% chance of occurrence, LTCi isn’t something that every person will need, although statistically, there is a 1 in 5 chance that an individual will have more $25,000 in out-of-pocket long term care costs; yet 1 in 10 people over the age 55 have long term care insurance.
It is important to note that an insurance company might grant an approval for a life insurance policy for the same person who was unable to obtain an approval for LTCi by the same insurer. This is an instance when I may suggest to a client that they consider a hybrid life insurance policy, that includes a long term care rider. With this type of hybrid insurance, 2% to 4% of the face amount of the policy can be liquidated and paid on a monthly basis to cover the expenses associated with a person’s long term care need.
For example, if the face amount of a hybrid Life w/LTCi policy is $350,000 and the insured decides to liquidate the value of the face amount by 3% ($10,500) on a monthly basis they would be able to cover up to $126,000 per year of long term care expenses. Liquidating the face amount of a hybrid Life w/LTCi policy will reduce the face amount of the life insurance policy on a dollar for dollar basis. However, this is not a bad option for someone whose health prevents them from getting approved for traditional LTCi; or if they lack an adequate amount of retirement savings to pay for their long term care expenses out of pocket.
Perhaps this post should have been entitled, “6 Ways Retirees Should…” instead of 5 Ways Retirees Should Protect Their Money During Retirement, because I wrote an earlier blog post for retirees about how to Convert Required Minimum Distributions Into Tax Free Income. I encourage you to read that post because it contains some information that could potentially help you increase the value of your estate.
For some who are age 70 1/2 with money sitting in a 401(K) or an IRA, having to withdraw their required minimum distributions simply because the IRS mandates it is an unfortunate fact of life. Therefore, why not learn how to convert the cash that you may be loathe to withdraw into future tax free income and potentially increase the value of your estate for the benefit of your beneficiaries.
Life is becoming more expensive year after year and since we’re not getting any younger, despite many of our best efforts, LTCi is something that everyone should consider, especially since 1 out of 3 older Americans enter a nursing home, or require in-home care.
The average annual cost for long term care (e.g. nursing home, or in-home) is $46,000 in 2017. If someone is 50 years old and they wait until age 65 to purchase LTCi, then the inflation-adjusted cost for care could exceed $175,000 per year! At the very least if you are retired, or preparing for retirement you should have a long term care illustration prepared for you so that you can include LTCi premiums as a retirement expense. Likewise, if your LTCi policy has cash value, then you should list this amount in the “assets column of your personal financial balance sheet.
As tempting as it may be to finally make a large purchase in fulfillment of your long awaited retirement dreams, whether it is a vacation home or a fancy car, insurance meets the fundamental need of protecting ourselves from the probability of having to claim the benefits of the type of insurance policy in question. As we get older, the probability of our need for certain types of insurance increases, because of the correlation between age and the number of insurance claims submitted.
As a retirement planning and investment management firm, our goal is to help you achieve a secure and hopefully stress free retirement. Therefore, trust us when we say ‘buying long term care insurance could protect your retirement savings and lead to greater peace of mind during your golden years.’