Will Long Term Care Actually Be Necessary?
As part of our planning process, we attempt to identify, quantify and reduce known risks. One of the bigger financial risks during retirement is unexpected long term care costs. What exactly is long term care? The need for short or long term services to help people live as independently as possible when they no longer can perform everyday activities on their own.
Before you stop reading, check this out. According to Genworth, over 70% of people over the age of 65 will need some sort of care during retirement. That’s a high probability to ignore. If you made your Welcome Aboard PA and let your passengers know there is a 70% probability of engine failure on takeoff, I bet you would have an empty airplane inside of 5 minutes. Yet you train for V1 cuts regularly over your entire career. Why? Because the potential impact of mishandling an engine failure is huge.
So let’s stop pretending this isn’t an issue and create a plan to pay for potential long term care costs. Notice I didn’t say buy long term care insurance; rather I said have a plan for how you will pay for the expenses when they occur.
The first step in addressing risk is to estimate the probability of occurrence and the estimated financial impact. We know the probability – 70%. Regarding cost, Genworth estimates the average annual cost of care on a national basis in 2039 (closer to the time when you will most likely will need it) will be $95,045 for in home care, $87,700 for assisted living and $184,585 for private full-time care. Depending on your need, the costs (particularly for a couple) can add up fast.
As part of our process, we give clients an assessment that helps them understand their potential costs based on their genetic background, their health history and the way they live their lives. This helps tailor and quantify the actual risk.
The second step in addressing risk is determining the role of these four strategies:
- Avoiding the risk – meaning you would take steps to make sure you aren’t exposed to this risk. This isn’t a viable strategy for long term care as we don’t always have control over how aging affects us.
- Reducing the risk – examples are avoiding situations that put you at risk such as taking steps to make your house fall proof, being extra careful with your diet, exercise and health to help reduce the need for care.
- Absorbing the cost yourself – paying for care from investments (you need to know how much surplus you will have) or home equity; having your children care for you.
- Transferring some of the risk to another source – examples are buying an insurance policy to help offset some of the costs; leveraging Medicare (although the benefits are slim); applying for Medicaid when you don’t have any more assets.
I would suggest that everyone can benefit from taking proactive steps to reduce the risk for care. Some pilot families may have enough resources to absorb the cost themselves. Many should consider some type of insurance product to supplement their other resources. Many effective plans involve a combination of all three.
This is a series about Situational Awareness and Action. The lack of Situational Awareness (SA) here centers on the probability of and potential financial impact of long term care for your family. Without this SA, it is difficult for you to properly address this known risk. The Action that you can take today is to work through Steps 1 and Step 2 to develop your plan to address the possible need for care during retirement. This isn’t a fun subject, but neither is an actual engine failure at V1. You wouldn’t ignore the possibility of an engine failure, so please don’t ignore this either.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Investing involves risk including loss of principal.