Long Term Care Planning: Putting it Off is Not a Plan

When Jen and I teach folks about how to prepare for retirement, we consistently focus on financial readiness. Being prepared financially is critical to a sound retirement system, one that can provide security, peace of mind and independence. We often find that one area overlooked in financial preparation, which can threaten this independence, is the cost of long-term care. But with medical advancements, life expectancies are increasing, and this is an area that needs more focus.

Last week, I was reading a report published by HealthView Services. Healthview is a leading producer of health care cost-projection software. They recently published a report emphasizing the importance of incorporating health care costs into your retirement plan. Yet, despite a growing concern about the ability to pay for these costs, there continues to remain a significant gap between awareness and action: while 61% of American workers are “significantly concerned” about their inability to cover future healthcare expenses, only 26% have calculated the monthly income they will require to address their needs in retirement .

Hmmm . . . this is a problem.

You see, for generations past this issue hasn’t garnered the same attention. But with the approaching retirement of millions of baby boomers, many of whom could be spending up to 20-30 years in retirement, paying for health care is becoming a huge concern. Increasing health care costs tend to be a bit lopsided as well, with over a third of those costs attributed to Americans age 65 and over. According to the Center for Medicare and Medicaid Services, health care spending for the 65 and older population is almost 3 times the spending per working-age person. To make things worse, it’s predicted that lifetime expenses will generally be higher for healthier retirees because they will, on average, live longer. While someone in poor health may pay more annually for care, their shorter life span will often result in a smaller total payout for health-related expenses!

From my view, preparing for the costs of long-term care or other health-related expenses in retirement is an area of retirement planning that doesn’t get the attention it deserves. It’s uncomfortable to think about being unable to care for ourselves and needing outside help. But this is a crucial element to a comprehensive plan. Anticipating the potential costs and preparing for them now will allow you to enjoy greater peace of mind, knowing that a health care event won’t decimate your investment and income plans down the line. So, where do we start?

There are a number of ways to pay for long-term care. The first, and simplest, is to pay out-of-pocket. Some retirees are fortunate enough to have the assets to do so, and having an income plan built around a solid investment plan can help with this. An investment plan designed and deployed for the distribution stage of your life must incorporate a risk mitigation infrastructure. Unlike the accumulation stage, the distribution stage is a bit more complicated since your investment plan must produce consistent and measurable income in retirement. While in the accumulation stage of your financial lifecycle, you may be able to withstand significant losses and be “just ok” in the long run. If your investment plan suffers the catastrophic losses as experienced in years like 2008 while in your distribution or retirement stage, well, your income plan evaporates and you may not be “ok”. Heck, even with a perfect investment plan, with the costs of long-term care being difficult to predict by individual, it can be hard to plan for this expense.

On the flip side of that coin is to qualify for Medicaid, a needs-based federal program. Many try to divest themselves of assets and limit their income in order to become eligible for Medicaid but are surprised to learn just how little they are permitted to have before they qualify. Additionally, many do not realize that their options may be severely limited if they are hoping to have Medicaid pick up the tab for long-term care. Not all facilities will accept residents who are on Medicaid.

Another option that has been slow to gain popularity is traditional long-term care insurance, which charges a monthly premium to pay for the possibility of long-term care expenses. With this type of policy, if long-term care is not needed, the premiums paid are simply gone, without receiving any benefit in exchange for the premiums.

Jen and I find that many people wait too long to apply for such a policy and by the time they do, the costs, which are based on age and health, are cost prohibitive. In addition, insurers who offer this coverage can increase the premium throughout the life of your policy. In fact, we have seen some premiums for policies increase by as much as 40-50% in the past decade, making it nearly impossible to budget for this over the long haul.

Get this, according to the American Association for Long Term Care, roughly 350,000 people purchased long term care in 2018. Of those, 16% bought the traditional insurance policies we discussed above. The remaining 84% took advantage of a newer breed of policies that insurance companies are developing to make coverage more affordable. These are often referred to as asset-based or linked-benefit coverage options and offer greater flexibility to accommodate different financial strategies.

One such option is to purchase a cash-value life insurance policy and select long-term care coverage through an added rider. With this policy, if the long-term care coverage is needed, the amount paid is deducted from the policy’s death benefit, up to defined limits. The purpose of this type of policy is to provide some kind of benefit, either for long-term care, or a death benefit, for the premiums paid. This way, if the policy owner ends up not needing long-term care coverage, at least his or her beneficiaries will receive a death benefit in exchange for the premiums paid into the policy.

Another alternative is to purchase a fixed-indexed annuity with a long-term care rider. In this situation, if you need to tap into your annuity for certain health-related expenses, your annuity income payments could double to help defray these costs.

Folks, like so many things in life, there is no bullet-proof answer that works for everyone equally. Nevertheless, being prepared for long-term care is critical to maintaining security and independence in your retirement. Don’t just simply brush it off as something you will look into down the road. Create a plan now, as part of your broader retirement strategy, so you are prepared when you need it – which is hopefully never.

Be vigilant and stay alert, because you deserve more.

Have a great week!

Jeff Cutter, CPA/PFS is President of Cutter Financial Group, LLC, an SEC Registered Investment Advisor with offices in Falmouth, Duxbury, Mansfield & Southlake, TX. Jeff can be reached at jeff@cutterfinancialgroup.com.

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