Long Term Care
Most people don’t realize that a long-term care event is one of the biggest risks they face in retirement, and that if it isn’t addressed, it can completely destroy an otherwise well-planned out retirement.
You may be asking, is this really true? And if so, why? The answer to the first question is yes, it is true. Over 70% of retirees who lived to the life expectancy will be faced with some type of long-term care event. For the second question, the reason so many retirees will be faced with a long-term care event is because of longevity.
Now, the great news is we’re living longer today than our parents or even our grandparents did. However, the bad news is that this longevity isn’t always because we’re in great health. It often is because doctors are better trained to help keep us alive even though our quality of life might not be as good as we would like it to be.
Let me help you better understand why long-term care can be such a problem in retirement. After 40 years of working hard to secure a nice retirement for his wife, Anna, and himself, Clarence Johnson finally quit his job as an executive at the local bank. They had enjoyed their lives together and were really looking forward to retirement and the freedom that would give them to do all those things they’d put off during their working years.
Security has always been a very important part of their lives. They’ve been consistent in their savings since they got married, even electing to forgo buying things they really wanted at times, all in hopes of them being able to enjoy an amazing future together.
The first 10 years of the Johnson’s retirement were amazing. Then Clarence’s life started to change. Slowly, he got to a point where he could no longer do the tasks he used to be able to do each day with ease. It was getting so bad that Anna knew she could no longer keep up with a care clearance needed. She contacted her local long-term care facility to try to help out. She’d heard these facilities were very expensive, but Clarence and she both had Medicare.
So how bad could it really be? Unfortunately for Anna, it didn’t take long for her to learn how bad it was going to be because in our first meeting with the facility, she was informed Medicare does not cover long-term care events. The only government assistance Clarence could qualify for was Medicaid.
But before Medicaid could even step in, she and Clarence would need to use their own assets, first to cover the costs. Then once they spent down their assets, where they only had one car, one house, about $128,000 of liquid assets, and $2500 in monthly income, then they could come back to their local Medicaid office and see what they could do to help them. Clarence ended up being in the local private long-term care facility for just over four years before dying quietly in his sleep.
The long-term care facility had done a great job of taking care of Clarence, but it came with a huge price tag, a cost of about $150,000 per year, and the Johnsons were required to spend down just over $600,000 of their own assets to cover this event. This spending down wasn’t a problem because, at this point, he already passed away.
But for Anna, Clarence’s long-term care event had completely ruined her future retirement. She would now be required to live a lifestyle that was much lower than Clarence and she had been able to enjoy most of their married lives. Unfortunately, this story I just told you is the story of far too many retirees. My goal is to help you better understand long-term care and the effects of long-term care events can have on your retirement.
You can start addressing the issues now rather than waiting like the Johnsons, to where it’s too late.
A long-term care event happens when you get to a point in your life, you can no longer perform two to three of the six basic activities needed for daily living. These six basic activities are: bathing yourself, dressing yourself, being able to use the toilet, being able to transfer yourself, which means being able to move from a bed to a chair without any help from anyone else, continence(the ability to take care of your basic hygiene), and your ability to eat. If you cannot perform two to three of these tasks, you’re deemed to be in need of long-term care.
Why do I say two to three of these six basic tasks? Because, depending on what company you’re working with, to try to determine your long-term care needs, some will use two and others will use three.
What’s the main problem when you get to the point you’re in need of long-term care assistance? Normal health insurance programs, including Medicare, are not going to step in and help cover the costs of the long-term care event. The only program the federal government has to address long-term care is Medicaid.
All the federal government really does is provide guidelines to each state on how they should address long-term care for the residents. Some of the federal guidelines you should be aware of are that if you’re single, or if both spouses need long-term care, the government’s going to require you to spin down your liquid assets to between $2000 and $3,000 before they step in.
If you’re a married couple and only one of you is in need of long-term care, the other spouse can keep somewhere between $25,728 and $128,640. As a community spouse resource allowance, the only assets that are exempt from the spin down is one house, as long as your spouse who is not in need of long-term care is living in it. You’re allowed household furnishings, one car, and about $1,500 of life insurance.
As you can see, there are very few assets getting excluded if you’re in need of the government’s assistance with a long-term care event. There’s also a minimum monthly maintenance needs allowance. The federal government controls the limit on the lower limits, $2113 and 75 cents a month and the upper limits, $3,216 a month. As you can see, this is not a large amount of money you’re going to be able to keep, and the only way to qualify for the upper limit of $3,216 is if you also qualify for the monthly housing and utility allowance.
As retirees have tried to figure out how they would address long-term care, they’ve historically had to choose from one of three options. The first option is the one used by most people, but it isn’t because it works so well. It was because this option was the default option for those who didn’t plan.
This option is to self-insure. This means that retirees would take the responsibility to cover the cost of long-term care with the assets they had available until they spent down their assets to a point where the government would step in and help them out. As you can tell from everything I’ve said in the story I shared previously, this option is not a good option for anyone who is expected to have anything left after a long-term care event.
The second option was to rely on family members. Now this option is one many people have had to use, but this option is riddled with problems from the beginning.
The biggest one is the loss of self-respect. Many retirees have to deal with this when they’re forced to put their burdens upon someone else. One of the other big problems with this option is the demands of long-term care event places on those who are required to financially support the event, or even more so for those who like to give the care. Long-term care is very demanding, and it can wreak havoc in the lives of those who are required to provide services to those who are in need on a daily basis.
The third option was to buy long-term care insurance. This is where a policy would be purchased specifically for the purpose of covering the long-term care event. Although this option is better than the other two, it, by no means, is a perfect solution because of the following reasons.
Number one, you have to qualify for long-term care insurance. You’re subject to any pre-existing conditions, which means if you have a bad knee, or a bad back, you’re probably not going to even be able to qualify for the insurance.
Second, the cost of insurance can be very expensive. Long-term care insurance can cost anywhere from $2,000 to $10,000 a year. When you add this to the high amounts that you have to pay for medical insurance, these premiums can just be too much for the average retirees.
Third, many of the long-term care insurance companies are either going out of business or no longer offer long-term care coverage. If you end up being one of the unlucky ones who purchase long-term care insurance through a company that’s no longer in business, you will end up losing not only your investment, but also your insurance.
And fourth, let’s say you died peacefully in your sleep after having paid long-term care premiums for a period of 20 years. What would you get in exchange for the benefits you paid? Absolutely nothing. There are no refunds. There is no account adjustment; you get absolutely zero. Your money is going to end up being used to cover the cost of others who bought insurance from the same company you did.
You may be starting to feel a little overwhelmed because I’ve given you a whole lot of bad news without much good news. But please know there’s an option out there to help solve the problem. It comes as part of a great benefit package for retirees. The option that many people are starting to choose to cover the risk of having a future long-term care event is a life insurance retirement plan.
This is one of the biggest benefits. This is a permanent insurance policy that contains a long term care rider. There are a number of reasons this solution has become the solution of choice for many retirees. There are two big ones I really like personally. The first one’s cost. In order to add a long-term care rider onto your permanent insurance policy, it doesn’t cost you anything if done through the right insurance company. This means that you’ve just solved one of the biggest risks facing your retirement without having to spend a dime for it.
The second benefit is if you end up having a long-term care event and have to use the insurance to cover it, the money received is going to be tax-free, which is a huge benefit, especially when you see the current tax structure for deducting medical expenses. If the money were not tax-free, you could end up having to lose a third of the money that’s supposed to be used to cover your long-term care event to the federal and state government.
Now that I’ve given you the good news that there is a cost-effective solution to addressing the long-term care risks facing your retirement, let me conclude with these final thoughts. If you want a retirement that looks anything like the retirement you spend most of your working years dreaming about, you’ve got to start spending your time putting together a retirement plan that will allow you to eliminate the risk base in your retirement.
Remember, long-term care is one of the eight risks I talk about when it comes to risk-based retirement. The others are tax rate risk, which is the risk that tax rates will be higher in the future. The second is longevity risk. This is that you’re going to live much longer than your ancestors lived. Then there is the sequence of return risk, which is the risk that the stock market will go down when you’re having to pull money out of the market, and there is the withdrawal rate risk, which is the risk that you’re going to pull out too much money and liquidate your assets before you run out of life.
Security risks, which is the risk that you take your Social Security the wrong time, and therefore don’t maximize your benefits. Or that you also put yourself in a situation where you have provisional income, and your Social Security is going to be taxed throughout the rest of your retirement. Inflation risk is the risk that you’re not able to keep up with inflation and therefore lose spending power during your retirement years. The last one is income diversification risk. It’s very important for retirees to have multiple streams of tax-free income.