Market Commentary – Long-term Care

I recently served as a panelist, along with Dr. Katy Votava, President of Goodcare.com, and Thomas West, ChFC, of Signature Estate & Investment Advisors, for a webcast sponsored by Investment News entitled, “Women in Retirement: Managing Longevity.”  With over 1,200 financial advisors registering to be in attendance, moderators Frederick Gabriel and Mary Beth Franklin attempted to shed light on a growing financial problem among Baby Boomers: most women retiring today are projected to outlive their savings.

As the founder of HVS Financial, I have been proselytizing for years about the financial dangers related to long-term care costs in retirement. Women are especially vulnerable financially because they have longer life expectancies than men and are often left without enough savings after their spouses pass on. Here are some important facts:

  • According to a Women and Long-Term Care Fact Sheet published by AARP,
    • Over 70% of nursing home residents are women
    • 70% of women 75 or older are widowed, divorced, or never married
    • 48% of Americans living alone are women compared to 22% of men
  • A healthy 58-year-old woman living in Boston will have a life expectancy of 90 years and close to a 50% chance of needing long-term care by age 88.
  • Average length of stay in a nursing home for a woman will be over 2 years
  • Average annual cost of nursing home care in the Boston area today is $123,000
  • Estimated annual cost 30 years from now will be $613,000

The aforementioned statistics are not the total story. Let’s say this 58-year-old woman is happily married to her husband of the same age. More than likely, she will live approximately five years longer.  Here are some other projections:

  • His life expectancy will be approximately 85 years
  • Average length of stay in a nursing home for a healthy 58 year old male will be 1.5 years
  • Estimated annual cost 25 years from now will be $495,000
  • Based on his potential 1.5-year stay, the couple may be responsible for $770,000 in nursing home expenses
  • Additionally, beginning at age 80, they will also be responsible for approximately $40,000 in health insurance premiums and other out of pocket healthcare expenses, such as co-pays
  • Note that the $40,000 mentioned above is the equivalent of around $22,000 in today’s dollars, not much more than the $16,000 cost of medical insurance premiums your current employer is paying for your family plan

According to Medicare, by 2020, between 12 and 14 million people are going to need some form of long-term care.  That means roughly 1 in 6 Boomers—or more importantly, one third of all couples—will require some level of LTC—enough to cripple a family’s life savings.

A common reaction is to assume that Medicaid is the solution. Think twice before depending on Medicaid, as benefits will likely be cut to help address the country’s deficit problems, and for the most part, current Medicaid benefits do not cover facilities with any real amenities. The key is to have assets available to cover the cost of at least a one-year stay.

On a personal note, since I am considerably older than my lovely wife Marea, I should probably keep these statistics and all sharp objects away from her (only kidding).  I am sure that she would not look forward to the possibility that keeping me alive in a nursing home might one day put her in the poorhouse.  Let’s face facts: LTC almost exclusively occurs during the final years of life, when loved ones are hooked up to a myriad of tubes and bags and often cannot perform the most basic daily functions.  I am sure that my wife cares about me very much and would do anything for me. But, writing a check for $500,000 a year just to keep me propped on some pillows is difficult for me to swallow.  What if it goes on for two years?  Three?

Fortunately, financial industry professionals are prepared to address this issue, and the time to act is now. Potential solutions to catastrophic long-term care costs include purchasing LTC insurance, looking into annuity products that offer long-term care riders, carving a portion of savings that can be allocated to LTC costs, and/or purchasing a universal life policy that offers LTC or catastrophic care riders (an additional benefit is related to the favorable tax status built into life policies).  Since the average Baby Boomer is looking at an investment period of 20 to 30 years, it is worth talking to an advisor about considering a more aggressive portfolio dedicated to LTC savings. If investors do not require LTC services, the accrued assets can be left to heirs.

Think about it: tackling this problem today could be the ultimate holiday gift for your spouse and children.

Happy Holidays!

The next Update will be posted on January 7, 2013.

The Update is written by Chris Leone and Ron Mastrogiovanni.

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