As I speak to people about retirement, an issue that continues to come up is the topic of asset protection. With the baby boom generation beginning to shift the demographics of the population towards retirees, a huge concern of asset preservation comes to the forefront. “Will I have enough money to last for my whole retirement?” is a prevailing question as the population begins to transition towards this stage in life.
While this issue usually focuses on portfolio or investment allocation, another issue to consider are those variables in retirement that can deplete assets quickly. I find that when I consider the variables, the need for some kind of assisted living services (whether in a nursing home or hiring a nurse to come to the home)has the biggest potential impact on a retirement nest egg. The average cost of a private nursing-home room is about $70,000/year according to a MetLife survey. Obviously, the impact of this cost will vary depending on the extent of care needed. For example, persons with cancer average 36 months of needed care vs persons with Alzheimer’s disease who need an average of 96 months of care.
While this issue seems to be of high potential impact, the biggest obstacle I come across towards addressing the issue is the cost to take care of it (usually the purchase of a long term care insurance policy). I will be the first to say that I do have a bias or stigma against insurance as its sales has been abused for the sake of generating commissions at the expense of consumers. However, I will not dismiss the potential value of such tools as a result of their misuse. As I look at the numbers, the cost of implementing such a vehicle is dwarfed when measured against the potential cost of not having such a vehicle in place. Of course, the actual cost varies, depending on how the policy is structured.
Issues to consider when assessing one’s particular situation:
1) The need for asset protection
A major consideration for pursuing long term care planning is the level of assets one has. At lower asset levels, the planning for long term care becomes less of a viable option as the costs become inhibitive of current lifestyle.
2) The cost of care in your area of retirement
Nursing home care costs do vary by geographical location. The nursing home costs determines the level of benefit one might need and therefore the expense of implementing a care policy. Genworth financial has some cost estimators on its website that can help in determining costs based on geographical location. Note, the younger you are, the cheaper the monthly premiums, regardless of geographical location. Therefore, while not an issue on the forefront of one’s thinking during the work years, many industry experts recommend that families start looking at this issue in their mid 40’s to mid 50’s.
3) Particular policy features
There are many bells and whistles when it comes to purchasing a long term care policy. One can choose to have inflations riders (the policy keeps up with the increasing costs of care), single or joint benefit, guaranteed renewable, nursing home coverage as well as in home coverage, etc. One needs to make a personal assessment after exploring the various features to determine an appropriate fit. Of course, the more features places on a policy, the more expensive the premium. So doing one’s homework is critical in this effort.
Summary
These are several of the factors to consider when researching the appropriateness of a long term care policy for oneself. The immediate cost should not be the only consideration as the long term cost could outweigh the immediate financial hit. In practical terms, it is more efficient to absorb the financial hit during one’s working years than during retirement when one is at the mercy of legislation and inflation. The government is aware of the increasing need to address this issue and has passed legislation where there may even be tax benefits to obtaining a long term care policy. As the population continues to shift in demographics, as parents start feeling the pressure of preserving 401K, IRAs and other assets in retirement while not being a burden to their children, the use of long term care as a financial planning tool will increase in awareness and use.
