Successfully managing retirement involves more than just estimating the amount of income a client will need to maintain a certain standard of living. It also involves estimating the amount of expenses they could reasonably expect to have. Factoring long term care costs into their post-retirement budget and expenses is a critical yet often overlooked step in the planning process.
While recent studies show that most people are well aware that they likely will need some form of care as they age, relatively few have factored long term care expenses into their retirement plans. They typically underestimate, or ignore altogether, the impact of a long term care event on the projected income stream they will need to live comfortably in retirement.
The missing question from many client-advisor planning discussions is, “How much of your retirement portfolio has been designated to go toward the costs associated with long term care?” As advisors, our job is to help clients understand that if they have not allocated any of their retirement portfolio to cover long term care expenses, then they have, in effect, allocated all of it for this need. People can too easily find their assets depleted, their choices limited, and their independence gone if they need care but have made no plans to pay for it.
From a historical perspective, retirement planning has hinged almost exclusively on the notion of wealth accumulation. Over the years, tremendous amounts of time and energy have been directed toward investment strategies to help us arrive at a specific retirement goal, while correspondingly little time and attention have been devoted to strategies that will keep us there.
In recent years, this model has evolved to include a focus on long term care issues and solutions. Increasingly, strategies for accumulating wealth are accompanied by strategies aimed at preserving that wealth through decades of retirement.
Today everyone from the mainstream financial media to the federal government is echoing what the long term care industry has been saying for years: that the greatest threat to one’s retirement plan isn’t interest rate risk or market risk; it’s living a long life.
A Wall Street Journal columnist recently cited the 10 biggest mistakes that investors are making with their retirement savings. Number one on the list? “Failing to prepare for long term care.”
A July 2007 article by The Motley Fool stated that the biggest danger to any plan for retirement is “failing to consider the impact of health-care costs.”The U.S. Department of Labor, in a recent Advisory Council Report, cited long term care as the greatest uninsured risk Americans face today.
A straightforward approach
It seems one of the hardest things to do, particularly when we’re healthy, is consider an unhealthy future. Part of the problem is no doubt the subject matter itself. In stark contrast to aspects of retirement planning that portray fun, sun and hours of unstructured relaxation, the image of long term care is, well … depressing. Whether viewed in the context of home care or the universally dreaded nursing home, LTC implies a loss of autonomy as well as a level of dependency on others for day-to-day functioning.
Add to that the fact that LTC is perceived to be a very complicated topic, by advisors and the general public alike, and it’s not surprising that it’s approached reluctantly, if at all.
The answers to these questions help us determine how significant the risk is, and whether it’s one we wish to retain ourselves, or if we should transfer some, most or all of it to an insurance carrier. It also gives us a much better sense of which strategies are viable and which are not.
What is the likelihood?
The actuarial tables don’t lie: Americans are living longer these days. But with increased life expectancy comes an increased likelihood that we will all experience a change in health and need to cope with certain illnesses and conditions. Thus, the good news, for most of us, is that we’re going to live longer than ever. The bad news, for many of us, is that we’re going to live longer than ever.
Insurance company statistics on the likelihood of needing care are often viewed with a certain amount of skepticism, but credible planning data is available from multiple non-insurance sources.
The Centers for Medicare and Medicaid Services estimate that 60 percent of people over the age of 65 will need some form of long term care. The American Society on Aging estimates that 60-70 percent of people over the age of 65 will need some form of long term care. And a rigorous study of health care utilization data reports that approximately 69 percent of Americans (58 percent for men and 79 percent for women) who turned 65 in 2005 will eventually require some type of long term care.
If we conservatively take the “best case scenario” of these projections–60 percent–and evaluate it next to some other risks that we’re familiar with, we gain a new perspective for the seriousness of the long term care risk.