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Funding long-term care

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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.

Ironically, while the majority of people willingly transfer the home and auto risks to an insurance carrier, this same majority will choose, often by default, to use their retirement plans as their sole source of liquidity against the much higher long term care risk.

What is the cost?
The common underlying theme of most retirement distribution strategies is twofold: (1) to safely maximize the amounts that are already there and (2) to lose as little as possible in the process of using it. Thus it’s safe to say that wealth preservation is a major goal for most retirees; one simply can’t afford to absorb huge losses.
Unfortunately, poor health can often result in a poor retirement, financially speaking. Numerous studies on post-retirement health care expenses and post-retirement finances have found a significant relationship between declining health and declining wealth.

As is true in most aspects of life, money makes a difference. The problem for most people, at least as it pertains to long term care, is that they don’t have enough of it. The majority of people simply cannot afford these kinds of expenses without financial assistance.

Additionally, while assigning a price-tag to caregiver responsibilities can be elusive, the impact on caregivers’ lives is as much a part of the ‘cost’ of long term care as any monetary amounts.

In February 2006 the New England Journal of Medicine published the results of a nine-year study to quantify caregiver burden, the largest study of its kind. It showed that, in addition to bearing the enormous and devastating financial cost of care, family caregivers are at major risk for their own health and emotional well being as a result of caregiving duties. The risk of heart disease, depression and premature death were all shown to be materially elevated among caregivers.

What are my options?
Obviously, long term care is about more than money. But make no mistake, your client’s ability to finance these costs will determine the quality of care they receive, the number of options available to them, and the amount of control they have over what they get. Ignoring this reality can be a financially devastating form of denial.

Health Insurance: Virtually every health insurance plan in the country, including Medicare and Medicare supplements, routinely excludes custodial care. Since custodial care is estimated to make up 80-90 percent of the long term care provided in America, health insurance clearly is not a reliable funding source for this need.

Medicare: Medicare was never intended, and has not been funded, to pay for LTC in the context in which we know it. In spite of this fact being stated explicitly in the “Medicare & You” guide published annually by the Centers for Medicare & Medicaid Services, every year a disturbingly large percentage of people surveyed on this topic incorrectly name Medicare as the primary payer of long term care expenses. Even the Social Security Administration, at the urging of Congress, recently added wording to their annual statements–sent to Americans age 25 and up–making it clear that long term care expenses are outside the scope of the Medicare program and that individuals need to take responsibility for their own long term care planning.

Medicaid: Medicaid, the health care component of the welfare system, was dealt a serious blow by the Deficit Reduction Act of 2005, lessening its viability as a long term care/planning tool, particularly for middle class and affluent clients. Regardless of one’s philosophy on the practice of artificial impoverishment to qualify for Medicaid benefits, it is becoming overwhelmingly clear that the government is taking concrete steps to return the Medicaid program to its original intended use–as a safety net for the poor.

Long Term Care Insurance: The concept of using insurance as an asset preservation tool is not a new one. Increasingly, LTCI has become a mainstream part of retirement planning and a key component to preserving assets.

Specifically, what LTCI brings to retirement planning is a solid defensive strategy; it protects the integrity of the retirement portfolio by providing a reliable source of tax-efficient liquidity that is separate and apart from the portfolio itself.

In this regard, one could correctly view LTCI as “portfolio insurance” on their net worth. For example, if my net worth is $500,000, a policy that costs $1,750 a year would cost less than one-half of one percent of my net worth per year. Leverage opportunities such as this are rare outside of insurance and applicable regardless of one’s net worth. The notion of spending a couple of hundred dollars per month on insurance premiums versus hundreds of thousands in potential care costs is simply smart money management.

The medical concerns and chronic conditions associated with LTC could ultimately ravage a lifetime of savings. With no other funding mechanism in place, retirement assets become the first line of defense against a risk that is very expensive, very likely to happen and not paid for by anything else.

No one likes to think of themselves as “getting old,” getting sick and needing care, but these things will become a reality for most of us. Carving out a well designed long term care contingency plan for clients to address these issues if they arise should rank high on the retirement planning checklist. Such a plan can provide peace of mind in an era of increasing longevity and rising healthcare costs and can be the foundation for protecting the retirement plan you and your client have worked so hard to build.