Many of us will need long term care as we age. The 2019 Franklin Templeton Retirement Income Strategies and Expectations (RISE) survey found that 80% of Canadians are concerned about retirement expenses. The top three concerns are around lifestyle expenses, assisted living care expenses and medical expenses. Yet, in March 2018, in-home care provider Home Instead found that only 13% of seniors have a financial plan for long-term care.
It may be daunting, but it is important to have a plan. Morningstar’s director of personal finance, Christine Benz, recently came up with a six-step process to create a long-term-care action plan as part of your total retirement plan:
Step 1: Gauge the likelihood of needing care.
The first step is to get your arms around how likely you are to need long-term care. The fact that many of us will need some type of long-term care in our lifetimes, so we should at least plan for the possibility. That's not to suggest that everyone needs to purchase long-term-care insurance, but rather that you consider the full range of options for covering your care if you develop a need.
Step 2: Get your arms around the costs.
What would care actually cost? According to a February 2018 Healthcare of Ontario Pension Plan report, typical annual costs for long-term care can range from between $25,000 at a government-run nursing home, to $200,000 per year for private, 24/7 care by professionals. Chances are most people’s needs would be somewhere in the middle.
You'll also need to factor in inflation when ballparking potential long-term-care costs. If you're younger than 50, especially, long-term-care inflation rate, compounded over many years, is pretty daunting. In a worst-case scenario in which two spouses need long-term care during their lifetimes, the costs could be double the aforementioned estimates.
Before assuming that you need a $200,000 long-term-care fund if you're going to pay for long-term care out of your own coffers (or $400,000 if you're part of a married couple), spend some time customizing those figures. Geography is important, as is the type of care you'd prefer to receive. Would you prefer to be in a nursing home? Or receive care in your own home? It's important to remember that most other household expenses, such as housing and food-related costs, would continue with in-home care, whereas they would be bundled in with the cost of care received in a facility.
If you're part of a married couple, bear in mind that it's not at all uncommon for one spouse to need long-term care while the other remains healthy. In such situations, the couple's financial resources will need to cover the costs of maintaining the household for the healthy spouse while simultaneously paying for long-term care.
Step 3: Assess available resources.
Armed with a reasonable estimate of how much long-term care might run you, you can then go back to your total in-retirement portfolio. Are your assets sufficient to cover your ongoing living expenses, based on a reasonable withdrawal rate strategy, plus the additional long-term-care costs?
If the answer is "yes, comfortably," you probably have enough to self-fund long-term care; proceed to Step 4. If your plan is tight, purchasing some type of insurance--even if it seems costly--is probably the right way to go; skim Step 4 and go to Step 5. (I say "skim" Step 4 because even if you purchase an insurance product, you'll likely need to pay for at least part of your long-term care out of your own assets.) If your in-retirement budget is so tight that setting aside a long-term-care fund or purchasing insurance isn't an option, public resources would be the default. That's covered in Step 6.
Step 4: Create a long-term-care fund: How much, where, and what.
If you've determined that self-funding long-term care is the right way to go, the next step is to put in place a concrete plan for doing so. If you determined the potential cost in Step 2 and you're still saving for retirement, you could simply incorporate that additional need into your retirement-accumulation goal, and recalibrate your savings target accordingly. Automating your contributions by using an automatic investment plan at your mutual fund firm or brokerage company can further instill discipline in the process of building up a long-term-care fund.
As you prep for and enter retirement, it will be essential to separate any assets earmarked for long-term-care needs from your spendable assets, so your long-term-care money will actually be there when you need it. I like the idea of creating a distinct long-term-care "bucket," segregating those assets from your other retirement assets. You could think of this as a multipurpose "last-stop" bucket that you could use to cover long-term-care needs, defray your living expenses if you live well beyond your anticipated life expectancy, or pass on to your heirs.
Where to hold the assets you're earmarking for long-term care is another consideration. Generally speaking, the older you are, the more conservatively positioned your long-term-care fund should be. The long-term-care funds of younger savers, meanwhile, can and should be more long-term-oriented and stock-heavy, because overcoming long-term-care expense inflation is a key part of the challenge.
Step 5: If insuring is the answer, investigate whether a stand-alone or hybrid policy makes sense.
If you've decided to purchase insurance coverage for long-term care, there are two main options for doing so: stand-alone long-term-care insurance policies and "hybrid" life/long-term-care or annuity/long-term-care products.
The stand-alone policies are straightforward: It's fairly simple to compare costs and benefits across these plans, and you can and should check up on the financial health of the insurer behind the policy. Yet many consumers who thought they were doing the right thing in purchasing the policies have had an unhappy experience: Premiums have spiked, forcing policyholders to choose between higher outlays or reduced benefits. Qualifying for coverage may also be an issue for would-be purchasers of stand-alone policies.
If you don't like the idea of paying premiums for a stand-alone long-term-care policy that you may never need, or you can't purchase such a policy because you have a disqualifying health condition, you can investigate hybrid life/long-term-care or hybrid annuity/long-term-care policies. Not only do they have an attractive "multitasking" quality--premiums won't be for naught if the purchaser ends up not needing long-term care--but health screening is often less stringent than is the case with stand-alone long-term-care policies. Additionally, the hybrid policies are often purchased with a lump sum, which means that policyholders won't face the same premium increases that traditional long-term-care insurance policyholders have had to face.
Yet, even as hybrid policies can make sense in certain instances, there can be significant drawbacks, too. As with any product that isn't straight insurance, the various features (and the fees associated with them) can make it difficult to comparison-shop. Perhaps more importantly, purchasing a long-term-care policy today may not look like such a savvy move in hindsight, especially if the premiums on stand-alone long-term-care policies stabilize and/or interest rates trend up--both realistic scenarios.
Step 6: If government-funded care is part of the solution, think through the ramifications.
If you've determined that you don't have the resources to cover long-term care--either by paying for it outright from your own coffers or by purchasing long-term-care insurance--government resources will be the only option. Just be sure that you fully understand the rules in place to qualify for it; that's especially important if you're part of a married couple and there's a realistic possibility that one of you will need care while the other remains at home.
