Long-term Care

For most of my clients, the number one goal is a secure retirement. The elephant in the room is what an extended care need could do to the savings that produce their monthly income. What used to be fatal is now just expensive.

Medicare and health insurance, in their current forms, cover illnesses and rehabilitation. What they usually don't cover is care when you won't get better. Medicaid might handle long-term care but only when your own assets are exhausted.

The illustration below shows a retirement cash flow report for the hypothetical Retiree family. Both Steve and Lydia are 65 and recently retired. If you follow this link you'll find two graphs on page 3. The one on the left shows the possible value of their portfolio based on their expected income and outflows. Over the years, their portfolio grows until their pension and Social Security won't keep up with the cost of living. I'd rather the trend kept rising but Steve and Lydia are still in the blue going into their 90's.

The graph on the right assumes exactly the same income and expenses as the one on the left except that we have added a long-term care need of $60,000 a year (in today's dollars, inflated at 4% per year) starting when Steve is 83 and lasting four years. This graph shows a different story. The strain on their savings depletes the portfolio to the point where it can't recover. Page 4 shows year-by-year detail.

These charts only show investment assets but we can include all assets. You may be able to harvest a real estate holding or downsize a primary residence. Not that you ever want to have to sell something but an orderly liquidation is better than a forced decision (and maybe someone else's decision) at a bad time. You want to stay in your home as long as you can.

We may have the option of insuring the risk. Standalone Long-term Care policies have been available for many years. A more recent trend is for life insurance companies to offer premature payouts if care is needed. A quick look in your existing policies might find a forgotten benefit.

I can't go into much detail here about either Long-term Care or life insurance. These are heavily regulated products and require extensive disclosure. A lot of it depends on your health too. If you should consider insurance, you will get complete information before making any decisions. I just want you to know there may be options that let you stay at home rather than at a facility you didn't choose.

Download this article as a PDF (requires Adobe Reader)