Anecdotally, we find that many investors either downplay the costs of LTC or exaggerate the likelihood of needing it. Those that downplay LTC tell us that they intend to stay healthy and avoid the expense. Alternatively, we find that investors who have witnessed family members who experienced worst-case LTC outcomes assume that they will also need years of care that will deplete the majority of their estate.
In reality, although you are likely to need LTC services, you are unlikely to experience devastating LTC expenses. About 15% of families will have no LTC expenses at all, and our analysis indicates that the median 65-year old couple in 2016 will incur a total of USD 200,426 in LTC expenses during their lifetimes. However, and this is a big however, roughly 28% of families will incur expenses of more than USD 500,000, and 10% of families will incur expenses greater than USD 1mn. Therein lies the challenge.
Will you need LTC services?
The simple answer is probably yes. While it’s difficult to imagine and to acknowledge the reality, our findings indicate that about 85% of couples will use some type of LTC services before they pass away. We believe there are some common misconceptions about nursing home usage as well. Based on our analysis, men and women have a 44% and 58% probability, respectively, of ever using a nursing home. More importantly, a 65- year-old couple has a 76% likelihood of at least one member using a nursing home for some period of time.
Perhaps, more surprisingly, approximately 77% of people who go into a nursing home return to the community — typically with a home health aide or by moving into assisted living. Accordingly, financial plans should incorporate the possibility of either returning home or moving to an assisted living facility. Since most families sell their home when they move to assisted living, we have assumed that once individuals use assisted living, they will not return home. They will either remain in assisted living, move to a nursing home, or eventually pass away.
How much do LTC services cost?Based on nationwide monthly averages, assisted living facilities cost USD 4,051, home health aides cost USD 4,385, and nursing home facilities cost USD 8,517. However, costs vary dramatically based on the types of service and the location in which they are provided. For example, a year in a nursing home costs approximately USD 68,000 in Oklahoma, but USD 148,000 in New York.
Here are 5 things to keep in mind…
1. Most couples will utilize some type of LTC service after the age of 65.
2. The median lifetime LTC expense for a healthy 65- year-old couple today will be USD 184,000, but some households will experience much higher lifetime expenses — up to USD 3mn.
3. Excluding LTC in a retirement plan can result in significantly overestimating the likely success of the plan.
4. Women, in particular, need to develop clear plans for handling LTC expenses.
5. LTC insurance products can help reduce, but not eliminate, the planning risk from LTC expenses.
Content is a product of the Chief Investment Office (CIO).
For more, including case studies, insurance costs, Medicare and citations, see Modern Retirement Monthly – Long-term care: A source of financial fragility in retirement 4 May, 2020.
Also see Modern retirement monthly: Healthcare in retirement, 27 April, 2020.