With millions of baby boomers approaching retirement, it is imperative for us to help this segment understand the potential financial impact of skyrocketing extended healthcare costs. The coverage this sector receives from Medicare is limited at best. Even if a qualifying event meets Medicare’s stringent guidelines, with both state and federal entitlement programs stretched to their breaking point, many retirees may find themselves without coverage. Without proper planning, many of our clients will simply not be able to afford future long term care expenses, which are projected to double over the next 15 years.
Read on to learn why it’s critical to help your clients put a long-term care plan in place.
A booming generation
From 1946 to 1964, the United States experienced an unprecedented increase in births. More than 76 million American babies arrived during that 18-year span, a dramatic increase from previous decades. Those born during this time period became known as part of the baby boomer generation, and the total number of people born into that generation represented a staggering 28 percent of the U.S. population.
It is predicted that by 2050, the youngest surviving baby boomers will just be turning 85, which will result in a nearly 0 percent increase in the over 85 population. The majority of boomers in this classification will need some form of long-term care—and this increase in demand will place an incredible strain on the long-term care system as we know it today.
With advances in modern healthcare, Americans are living increasingly longer lives. Recent estimates predict a healthy man who is 65 years old today will have a 24 percent chance of living to at least 90 and a woman of the same age a 35 percent chance of living that long. These statistics have been recognized by the insurance industry as precursors to what could be a run on the long-term care system. Even with our clients maintaining their health longer, studies show that seniors still have a 70 percent chance of experiencing at least one long-term care event during their lifetimes.
As advisors, it is our responsibility to help boomers recognize the potential financial ramifications these circumstances could have on their retirement dollars. We must work diligently with our clients to put a plan in place that will allow them to maintain their physical and fiscal independence.
Current Cost Predictions
Seniors who currently receive long-term care in a nursing home incur costs ranging from $40,000 to $80,000 or more each year. Regardless of where the care is administered, whether at home, in adult day care or in assisted living, the expense to a consumer living on a fixed income is usually more than he can afford. Industry experts predict these costs will increase steadily as boomers begin to saturate this market.
Below is an illustration of the average costs of long-term care in the U.S.:
- $6,138 a month for a semi-private nursing home room
- $6,789 a month for a private nursing home room
- $3,131 a month for care in an assisted living unit
- $21 per hour for a home health aide
The costs outlined above are affordable for some of our clients, but not most. Using these figures, a client who requires a home health aide for only 12 hours a week, can expect to pay $252 each week, or $13,104 annually. With the average median income of seniors reported in 2009 as only $31,000 per year, this long-term care expense can easily represent more than 40 percent of a client’s income. Many seniors are finding it difficult to make ends meet before the need for long-term care even arises.
In today’s economic climate, it’s also unrealistic for boomers to rely on family care. Although our clients may assume their children will take care of them if they need help, the reality is that the sandwich generation (the children of boomers) are being squeezed already. Many of them are still reeling from their own economic losses, job losses and perhaps even foreclosures and bankruptcies. They are simply not in a financial or emotional position to provide adequate care.
Even with all of this data, many clients still refuse to see the need for long-term care planning. As advisors, we must impress upon them how critical it is to protect themselves, their children and their retirement nest eggs, from these devastating events.
The simple solution
How can we help our clients handle the skyrocketing costs of a potential long-term care event? The answer is simple: long-term care insurance (LTCI). Without LTCI, a nursing home stay or another long term care event could devastate a client’s finances. LTCI covers many of these exorbitant expenses. This necessary form of insurance will not only provide protection for the client’s finances—it will also help the community spouse maintain their current standard of living if their husband or wife requires long term care. Proper long-term care planning is essential for single, widowed and divorced clients who, because of spend-down guidelines, are at a much greater risk of becoming destitute.
Even the affluent need coverage
For more affluent clients, the need for long-term care coverage is not as evident. Many of our high net worth clients assume that they have more than enough money to self-insure for long-term care events. But even with $2 million in liquid assets, not including a home, a wealthy couple will barely have enough resources to cover a five year stay in a private nursing home room.
There are several factors that our clients forget to take into consideration when predicting long-term care expenses:
Inflation: The ever-increasing rate of inflation could quickly magnify the cost of long-term care. In recent years, the cost of nursing homes and assisted living facilities has risen by 5 to 6 percent each year, and experts predict these costs will continue to rise at similar rates in the future. If prices continue to grow by 5 percent each year, long-term care costs will double within 15 years. Today, the cost of nursing home care in the United States varies from $50,000 to more than $100,000 per year. If the current rate of growth continues, this cost will mushroom to $100,000 to $200,000 by 2026.
- Taxes: Unless your client is taking advantage of the Pension Protection Act, which allows a person to use gains from a non-qualified annuity to pay for long-term care expenses with no tax implication, he may be spending down his IRA faster than necessary. Since distributions from retirement accounts are 100% taxable, this could cause an unexpected increase in taxes for your client.
- Capital Gains: If your client is forced to sell an asset from her portfolio, or perhaps even sell real estate that has appreciated in value, she will face additional tax consequences, perhaps at an even higher tax rate than ordinary income.
- Lost investment opportunities: If a client pays out of pocket for long-term care expenses for five years, he would be using a significant amount of money that could have been allocated to other investment opportunities.
When factoring in these additional costs, the true cost of long-term care for an affluent client and spouse could be more than they are prepared to pay. This underscores the need for proper planning for even the wealthiest of clients.
High net worth clients who may have enough wealth to adequately cover the astronomical expense of this type of care may also appreciate the value of leveraging. After all, most of the wealthy clients we see did not get where they are without using other people’s money.
Let’s assume a client aged 65 can purchase $225,000 worth of LTCI paying a maximum benefit of $75,000 for three years. The premium would be roughly $3,600 per year for a healthy man at this age. If he does not start receiving benefits until the 10th year, he still has only invested $36,000 (which may even be tax deductible) and would receive a total of $225,000 in benefits. This equates to a return of 625% on his investment. Take into consideration the value of today’s dollar versus tomorrow’s expenses, and the return may be even higher.
LTCI Provides Protection and Peace of Mind
Without LTCI, the cost of a nursing home stay or a home health care aide could wreak havoc on a client’s finances and whittle away at the nest egg you’ve worked so hard to help them maintain. A proper long-term care plan is most often the one missing piece of the financial puzzle. If you open up this uncomfortable but necessary dialogue with your clients, you will benefit your clients, their families and the relationship you have with them for many years to come.
(Data collected for 2009 statistics from U.S. Department of Health and Human Services)