By Chris Chen, CFP
You need a plan to pay for long-term care (LTC). About 70% of us will end up needing LTC, making it a high probability event with a potentially large and uncertain cost. For many of us, LTC may well end up as the single most significant expense of our retirement.
Aware of the potential impact of the cost of LTC, Jill wanted to know if she should purchase a long-term care insurance policy (LTCi) or put her assets in a Medicaid trust. She reasoned that with the first option, the insurance policy would cover her costs up to the coverage limit. However, Jill balked at the cost of the policy. With the Medicaid trust option, all of her expenses would be potentially paid for by Medicaid, but she would have to put all of her assets into an irrevocable trust. She found that unattractive as well.
Caught between two unattractive options, Jill decided that she needed clarity so she could make a decision based on facts and not emotions. She thought she would check in with a fiduciary fee-only Certified Financial Planner® professional. Jill found a planner easily enough. She was a little shocked at the cost of a consultation. She was not used to paying directly for financial advice. For example, she never paid her insurance sales representative, Jason, any money, at least directly. After taking a big breath, she agreed to the cost, scheduled a Zoom consultation, and asked her daughter, Kim, to join.
LTC is unpredictable
Oddly, she was comforted when her planner confirmed that it is difficult to predict the cost of LTC. First, it was not certain that she would need it: about 30% of us end up not needing it. Because long-term care can range anywhere from a few hours of home care a day to years in an assisted living facility or a nursing home, it was not easy to calculate how much it might eventually cost.
After thinking a little, Kim suggested that Jill needed to understand what her resources were. Jill owned her own home with about $600,000 in equity using the Zillow valuation as a benchmark. She also had somewhat over $900,000 in retirement assets and other financial assets worth about $150,000. Jill had always thought that if she did not have LTCi, she would have to use her assets to pay for the cost. She was concerned that there would not be enough and that she may not be able to leave anything for Kim and her brother. Kim rolled her eyes slightly.
The planner pointed out that Jill was making a reasonable income. That took her by surprise because somehow, it had escaped her mind that her resources also included her income. Jill received about $35,000 annually in Social Security and $25,000 from the QDRO (qualified domestic relations order) of her ex-husband’s pension. Also, she had her own pension that paid about $10,000. In total, she had a little over $70,000 in income. Realizing that, Jill smiled.
What about the house?
It dawned on Jill that if she had to move into assisted living, many of her current expenses would go away. That would liberate cash flow to pay for the assisted living facility costs. She realized suddenly that she might also be able to sell her house, cut the related expenses, and use the proceeds. Kim confirmed that she and her brother would not want to keep the house after Jill passed away.
Jill thought about how she might feel about selling the house. She remembered that her aunt went to assisted living, thinking that she would need the house to come back to. Jill knew that she might change her mind and, like her aunt, refuse to sell. But for now, it was an assumption she was willing to make.
Jill could afford LTC
Based on her current income, she could afford to move into assisted living at current rates. Not that she wanted to!
The planner also pointed out that Jill’s income and costs would likely diverge because of inflation, with expenses growing faster than income. Although Social Security has an annual cost of living adjustment, Jill’s pensions did not. At the same time, the cost of assisted living regularly increases, sometimes faster than inflation. However, at first blush, it looked like she could pull through when the time came.
Kim asked how to deal with the increasing cost of living and whether it made sense to continue Jill’s very conservative investment allocation. Excellent question! The planner explained that Jill’s money needed to continue working for her. If she kept it too conservative, her nest egg would lose ground against inflation. To address her safety concerns, Jill would need to differentiate between money that she would need in the relatively short term and money that she would not need for a while. Jill could keep the first pot in a conservative allocation to insulate it from market fluctuations. She could reach for more return with the second pot, thus balancing the need for safety and growth.
The planner made a point to insist that this was all preliminary, that he needed to go fire up his spreadsheets to give Jill a more definite answer. However, Jill and Kim were excited because they could see that Jill could probably afford long-term care, leave something for her children, and maybe even spend a little more on herself. Kim was relieved because she could feel the fear of her expected financial burden dissipate.
Jill and Kim came back a week later to see what their planner had cooked up. He showed them potential cost projections depending on how long Jill might need long-term care. He showed them a range of projections that would capture many of the possibilities. They decided together the range of options that would make Jill feel comfortable.
He also showed them how changing her investment plan would allow her to be secure and potentially increase her assets, thereby aligning better with her life plan. Jill felt a little concerned. She asked what if all these projections and assumptions were wrong and all the money went “poof.” However, being one step removed from her Mom’s emotions, Kim saw the logic.
Finally, the planner suggested that Jill should consider purchasing a hybrid life insurance policy that would convert into a long-term care policy if needed. Should the need arise, the insurance policy could serve as a cushion and cover some long-term care costs. If not required, Kim and her brother would benefit from a death benefit free of income tax. The thought of a “death benefit” made Kim a little uncomfortable. However, Jill felt better about using some insurance in her plan. The planner reminded them that he would not get a commission if Jill purchased the policy as a fee-only fiduciary.
Jill trusted the planner. She was grateful for the clarity that he provided. Most importantly, Jill felt more confident about the future. She decided to take the weekend to think about it.
On the following Monday, Jill called the planner and asked if he would continue planning for her. She wanted her modified investment plan implemented. Jill knew that it had to be updated regularly and that she would need help with that. She also needed help aligning her taxes and estate plan to her new perspective. Jill was pleased that her new financial plan fitted better with her life plan.
About the author: Chris Chen, CFP®, RLP®
Chris Chen, CFP®, RLP®, is the founder of Insight Financial Strategists LLC in Newton, MA. As a Wealth Strategist, Chris works with women who want to plan for a brilliant retirement post-divorce. He is the co-host of Divorce Friday, the podcast that addresses your financial questions about divorce. You can reach him at firstname.lastname@example.org or 781-489-3994.