Few people want to talk about the end of their life, but it’s an issue that many of us will have to manage. The average American lives seven years longer today than 60 years ago.
However, the trade-off is potentially living more years in poor health. Today, someone turning 65 has close to a 70% chance of needing long-term care services.
While planning for a potential nursing home stay is not as exciting as mapping out your next family vacation, health care expenses need to be included in a financial plan, and they’re not cheap.
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Long-term care is expensive
From home health care to nursing homes, costs can quickly add up. Monthly expenses can range from $6,000 to $11,000, and people tend to stay in assisted living or nursing homes for prolonged periods — the average nursing home stay is 485 days.
The average 65-year-old may need $165,000 to cover health care expenses in retirement.
What’s more, costs will increase with inflation, which is currently about 3%, meaning those same health care expenses could rise to nearly $350,000 by 2050.
Medicare usually doesn’t cover long-term care expenses, and Medicaid kicks in only as a last resort for extremely low-income families.
If you don’t plan, you are likely on the hook for the entirety of the expenses. Medical debt also doesn’t disappear when you pass away.
The remaining debt will be taken out of your estate, and if that isn’t enough, in some cases, it could leave your family liable for the remaining bill. Simply put, a durable financial plan must include how to pay the bills for long-term care.
Managing the cost
Self-insurance. With proper planning, there are solutions to help mitigate the costs. If you’ve saved enough money, you may be able to self-insure and cover the expenses out of pocket. Think of this as covering the costs “dollar for dollar.”
Taxes are the biggest thing you should keep in mind if you choose to pay for expenses out of pocket. If you suddenly need $50,000 to pay for a nursing home and withdraw it from a tax-deferred account, that adds to your taxable income and could lead to a hefty bill come tax season.
A way to circumvent this is to strategically convert portions of your tax-deferred assets to a Roth account ahead of time, or withdraw smaller amounts each year and save them in accessible accounts for when you need them.
Asset-based long-term care. Another option is to self-insure through asset-based long-term care. This is where the self-insuring strategy is amplified and you are able to self-insure for “pennies on the dollar.”
The two main vehicles for self-insuring through asset-based long-term care are an annuity or a life insurance policy.
The fixed-annuity option allows you to allocate a portion of after-tax dollars into a contract that will grow at a fixed interest rate. Should you need long-term care, the value of what the contract has grown to will be multiplied by either two or three times.
So for example, a $50,000 contract could provide up to $150,000 of coverage for these long-term care expenses. The nice part about a strategy like this is if you don’t need the care, you don’t lose the money. You just had the allocated dollars growing at a fixed rate in an account with no downside risk.
A life insurance policy operates similarly. Premiums can be paid monthly or in a lump sum, and the account grows in interest from the premiums paid. While traditional life insurance is reserved for your loved ones after you die, this option can cover long-term care while you’re alive.
Just like an annuity, if you don’t need long-term care, the tax-free death benefit is paid out to your loved ones much like traditional life insurance.
Using asset-based long-term care is like moving money from the right pocket to the left pocket. The asset remains yours and continues to grow at a determined rate while providing leverage in the event you need long-term care.
Long-term care insurance. While self-insuring has many benefits, it can require a larger portfolio and may not be an option for everyone. If that’s the case, you may need to look into a traditional long-term care insurance policy.
A traditional policy operates like health and life insurance: you pay a regular premium for coverage up to a set amount should you require long-term care in a nursing home or home health care. That total typically grows at a set rate per year to keep up with inflation.
Right now, annual premiums for a $165,000 initial pool will cost a 55-year-old couple $2,000 to $8,000, depending on how fast the pool grows each year.
Long-term care insurance requires you to pass medical underwriting, and pre-existing conditions, such as cancer or early symptoms of Alzheimer’s, may prevent you from being insurable.
This option is also a use-it-or-lose-it proposition. While the previous two options keep your money in your portfolio even if you don’t need long-term care, this functions like health insurance — the premiums leave your hands every month.
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If you never need coverage, the money is lost. We view this as a last-resort option if self-insurance is not for you.
Start planning as early as possible
Long-term care is not a fun topic, but it’s something many of us will need to proactively consider.
From asset-based coverage to traditional long-term care insurance, there are options that will protect you and your loved ones. But start planning as early as possible.
I recommend starting the process before you turn 60. Rather than ignoring the possibility of ill health in old age, work with a financial adviser to create a financial plan that prepares you for your golden years, whatever they bring.
The commentary on Kiplinger.com reflects the personal opinions, viewpoints and analyses of the author, Matthew Eilers, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security, or any security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Foundations deems reliable any statistical data or information obtained from or prepared by third party sources that is included in any commentary, but in no way guarantees its accuracy or completeness.
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