Heads or Tails? Would you let a coin flip cost you half a million dollars?
February 10, 2023
Imagine for a moment you are 65 years old. Actuarial science tells us if you’ve made it this far, there’s a 70% chance a specific type of event will happen to you, and a 48% chance said event will have a financial impact when it occursi. Unfortunately, the magnitude of the financial impact is dependent on how long the event lasts, which is unknown for you. Sometimes it’s just a few months, sometimes it’s 10+ years. If you want to go off averages, it would be around 2.2 years for men and 3.7 years for womenii. Now, one thing we do know, is an estimate of the average monthly cost, but even that has a range depending on how severe this event is for you and what state you live in:
- If you’re in the 48% and you’re a male living in Minnesota with a 2.2-year event, you can expect the cost to be between $136,303 to $344,652.
- If you’re in the 48% and you’re a female living in Minnesota with a 3.7-year event, you can expect the cost to be between $229,237 and $579,642.
Those numbers are in today’s dollars, and historically the costs of these events have increased at a rate faster than inflation.
So, if you knew you had almost a coin flip’s chance of incurring a cost like this in retirement, would you plan for it?
I’m sure many of you have caught on by now that we’re talking about long-term care: services that are required when an individual cannot perform basic activities of daily living (eating, bathing, dressing, continence, transferring and toileting). The advancements we’ve seen in medicine, healthcare and lifestyles have benefited humanity greatly. However, increased longevity has added a crucial financial planning need for many households, that if unprepared for, can have significant consequences. It’s our hope that all clients have a plan in place so that the following four things can happen:
- Be able to pay for quality care and maintain dignity in your later years.
- Take the strain off family members who would be providing free care (note: 41 million Americans are currently doing this for a loved one)iv
- Preserve wealth for your surviving spouse in retirement
- Protect your legacy
Before we talk about options, we need to point out one key piece of information. Medicare does not cover the bulk of long-term care expenses. Medicare provides very limited coverage for long-term care, and after day 100, you are responsible for 100% of the cost. Medicaid* is the state administered, government funded program that could cover long-term care expenses, but it is only for low-income households. To qualify, a couple must spend down assets to $3,000. The healthy spouse may retain $636,000 in home equity and can receive up to $2,523 per month in income without disqualifying the spouse in need from aid (as of 2022 in Minnesota). If given the choice, most people will prefer to avoid this route.
So, if long-term care isn’t covered by Medicare, and ideally, you want to avoid going on Medicaid, there’s a hefty liability looming out there in our later years that needs to be planned for. Assuming a 3% inflation rate on cost for care, you can expect the total liability to double every 24 years. This means this conversation is for younger generations too, and it’s never too early to start talking about it.
Take a 35-year-old female for example. If we split the difference between assisted living and nursing home care over a 3.7-year long-term care claim, the expected cost would be about $360,000. If we assume 3% inflation and the long-term care need begins at age 80, the future value of her long-term care event would be $1,386,000 in 45 years.
She may end up being one of the fortunate ones who has enough wealth in her later years where her plan supports self-funding a long-term care need. But she can’t know with confidence now that that will be the case in the future. For many who end up in this position, it likely wasn’t built intentionally to cover the future liability. We don’t tend to think that way about our wealth, and we don’t necessarily want our plan to be built on a hope that may not come to fruition.
If she’s ambitious and wants to begin saving now, she would need to save $429.41/month from 35-80 (assuming a 6.5% rate of return). If she waits until 45, the monthly savings need goes up to $866. And by the time she’s 55, when many people start thinking about long-term care for the first time, her monthly savings need is $1,851 per month. Cumulative contributions would be $231,660 starting at 35, $363,720 at 45, and $555,300 at 55. We haven’t come across anyone who has chosen to fund their long-term care need this way. With competing interests at 35, not to mention how difficult it would be to not touch that large sum of liquid money for 45 years, this is probably an unrealistic strategy. When we’re dealing with liabilities in the $1 million range, other options should be explored.
So, imagine yourself one more time as a 65-year-old. How important will it be to you then to have a long-term care plan in place? How often do you think you’ll think about the aging process? How will your plan impact or not impact future generations? It might not be urgent now, but it will be critically important later in life. Thankfully, there are a number of different long-term care solutions that are appealing at various life stages, even for the 35-year-old from earlier. If you haven’t started creating a long-term care strategy, our team at Voyage would love to discuss options with you, and determine what solutions best align with your values, goals, and personally crafted financial plan. Connect with us today to get started.
*For state Medicaid eligibility, go here.
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