Should Wealthy Retirees Self-Insure Long-Term Care?
We've been talking a lot lately about how the cost of living and inflation can erode your purchasing power throughout retirement.
But there’s another subset of costs that we plan for separately: health care. Our planning projects health care costs to grow about 6% a year, compared with 3% for other living expenses.
Your retirement plan needs to anticipate not just higher drug prices and Medicare premiums, but also rising health care needs as you age.
And if you or your spouse eventually needs long-term care that Medicare doesn’t cover, the out-of-pocket costs can easily run you tens of thousands of dollars every year.
Wealthy seniors have two long-term care tools at their disposal: their nest eggs and the ability to pay for long-term care insurance. You can start clarifying your best options by working through this four-step checklist:
1. Stress-test the worst-case scenario.
According to the Center for Retirement Research at Boston College, 80% of 65-year-olds will need long-term care at some point in their lives. The federal Administration for Community Living estimates the average length of care at about three years.
So why not just price out three years of assisted living in your state and keep that amount in an emergency health care bucket?
Because those figures are averages. And, for better or worse, you won't have an "average" retirement. Your journey won’t be the same as any other retiree’s, even your spouse’s.
The true strength of your retirement plan isn't measured by averages, net worth, or what you can afford. It's measured by how resilient your plan is when variables shift unexpectedly.
So, if you're confident that you could pay for three years of assisted living, model a five-to-seven-year stay.
Project costs if you or your spouse experiences cognitive decline that might require specialized memory care.
Analyze how your plan would respond if you both needed in-home nursing care at the same time.
Assuming you and your spouse are both healthy when you retire, the averages suggest long-term care may not threaten a healthy nest egg.
But an above-average, worst-case scenario could cost you hundreds of thousands of dollars – if not more.
2. Clarify what you’re protecting.
For seniors with modest savings, long-term care planning is primarily about avoiding significant financial hardship. Long-term care insurance can be a cost-effective way to do that, as long as the premiums stay affordable.
Wealthy seniors usually have the means to cover long-term care needs and still protect other retirement goals, such as:
The Surviving Spouse’s Lifestyle: Ensuring that a multi-year health crisis for one spouse does not force a healthy or surviving spouse to downsize their home, cut back on lifestyle spending, or live in fear of market volatility for the remainder of their life.
Legacy Goals: Protecting the capital you intend to pass down to your children, grandchildren, and charitable causes.
Liquidity: Avoiding the need to sell real estate, business interests, or other illiquid investments just to pay medical bills.
Confidence: Believing in your plan strongly enough that you don’t hesitate to visit the best specialists, move yourself or your spouse into the best facilities, or cross a couple more items off your bucket list while you’re still able.
3. Compare your three main options.
When considering the best way to prepare for long-term care, don't think in terms like "pros" and "cons." Think about how each of these tools would respond to best-case and worst-case scenarios.
Self-Funding
Best Case: You retain 100% of your capital, avoid insurance underwriting, and never pay premiums for a benefit you might not use.
Worst Case: Uncapped exposure to a multi-year long-term-care event. If you empty your emergency health care cash bucket, are you prepared to liquidate investments, take large distributions from retirement accounts, and account for the tax consequences?
Traditional Long-Term Care Insurance
Best Case: If you pay for appropriate coverage, then your insurer assumes much of the cost of your long-term care, up to the limits of the policy. Some policies offer inflation riders that increase your benefit over time.
Worst Case: Use it or lose it. If you and your spouse don't end up needing long-term care (a good thing!), your premiums are a sunk cost. You should also plan for possible premium increases for as long as you're paying them.
Hybrid Products
Best Case: By linking long-term care coverage to a life insurance policy or an annuity, you reduce the "use-it-or-lose-it" dilemma. If you need to pay for long-term care, the benefits are generally free of federal income tax. If you never need care, your beneficiaries receive a death benefit, which is generally income-tax-free with life insurance (or the accumulated annuity value), returning your capital to your estate.
Worst Case: If you don't end up needing long-term care (still a good thing!), you'll be putting money into a product that probably won’t earn as much as it would if you invested it in a brokerage or retirement account. You’re also tying up some of your overall liquidity in a product that usually can only be used for health care costs.
4. Sketch out the logistics.
No matter which long-term care option you decide on, many of the most important details won't show up on your balance sheet.
And, in many families, managing these "costs" will be far more complicated than paying bills:
Where will care be received? Are at-home and in-facility options close enough to loved ones who can provide additional support?
Who will be the primary caregiver? If one or both spouses are unable, who is going to provide daily care and/or coordinate with professional aides?
Who has authority to make the hard decisions? Review and, if necessary, update your estate-planning documents, including your living trust, health care proxies, and durable powers of attorney.
How involved will adult children, siblings, and extended family be? Having an open, honest conversation with your family can clarify who will be responsible for what.
Making informed long-term decisions.
No matter how healthy you are right now, and no matter how much money you have, you can't eliminate the long-term care risks your retirement plan faces.
But Keen Wealth can help you make intentional decisions about how to prepare for those needs and manage their potential financial impact on you and your family.
Let's add a long-term care conversation to the agenda for your year-end review meeting. We can stress-test your plan against any recent changes to your health and discuss how to protect you, your spouse, and your legacy.
About Bill
Bill Keen is a financial advisor with over 30 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he focuses on providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to Forbes, U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
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