By FPA member Jason Branning, CFP®
Last Updated: September 20, 2010
One of the greatest screen stories of the 20th century is The Wizard of Oz. When Dorothy, a young farm girl from Kansas, is transported by tornado into the strange land of Oz, she is forced to confront new challenges. In Oz there are many risks Dorothy is not prepared for, like witches and flying monkeys. Retirement can be similar to Oz because retirees must face many new and strange risks.
A method to addressing retirement risks is offered in a Modern Retirement Theory1 context. Modern Retirement Theory argues that there are two primary risks to retirees that must be managed. These risks are longevity and conditions within longevity. Longevity is the risk of outliving your retirement resources. Conditions within longevity are risks that are rare, but could pose significant stress on retirement resources, relationships and health. A few examples of conditions within retirement are a long-term care need, a couple caring for aging parents, or retiring during a negative market cycle. We’ll focus on conditions within longevity and specifically on possible long-term care solutions retirees should consider.
A long-term care need consists of assistance with essential, routine tasks of life (such as bathing, getting around the house and preparing meals) provided to people who need this help because of physical or mental conditions or disability2. Essential or routine tasks are also called activities of daily living (ADLs). Generally, to qualify as a recipient of long-term care services, an individual must not be able to perform at least two of the six ADLs (bathing, transferring from bed to chair, getting dressed, etc.) or have a cognitive impairment like Alzheimer’s.
The MetLife Mature Market Institute® found that 10 million people in the U.S. need long-term care. More than six in 10, or 63 percent of the 10 million are over age 65, which demonstrates why pre-retirees and retirees should think through what they will do if they have a long-term care need3.
How can pre-retirees or retirees prepare for the possibility of a long-term care event?
First is through the purchase of long-term care insurance, preferably before age 60. Individuals can partially transfer the risk of long-term care expenses to an insurance company, assuming you are insurable. If you choose to insure against even part of this risk, the possible expenses out of your pocket or retirement savings can be minimized. A few ways to partially insure are by choosing a policy that has a daily benefit that is less than the total cost of a facility (i.e. insuring $100 per day rather than $185) or by selecting a specific benefit period (coverage will pay for three years or five years). The key reason to have a long-term contract in place is to help protect your retirement assets or you and your spouse’s retirement lifestyle.
Many times the task of helping a loved one falls on a family member in a private home. Do you want a family member to help you through a long-term care event? Most long-term care contracts offer home health care riders that will allow an individual to receive help at home. How important would it be to you or another dependant to receive help in your home?
While there are nearly 77 million baby boomers, in 2005, there were only about 7 million long-term care policies in affect and the typical purchaser was 61 with over $100,000 of assets4. Have you consciously decided how you will pay for a long-term care event should it occur?
Premiums for married couples in their 60s during 2008 were estimated at about $3,000 per year5. If you think that insuring your home is desirable, why would you not agree that insuring your retirement lifestyle is not equally desirable? In addition to protecting yourself through a long-term care contract, there may also be a tax perk. Talk to your accountant to find out if the premiums paid for a contract is tax deductible. The possible tax deduction may make the cost of the policy more affordable than you first thought.
A second option is a continuing care facility. These facilities offer stages of care including independent, assisted living and nursing home. By choosing a continuing care facility as an independent before the care is needed, the price for the higher stages of care would (in many facilities) be the same as independent care. In this solution, the individual is locking in the maximum out-of-pocket expense for a long-term care event to the effective rent charge for independent living.
This solution also offers a tax friendly way to pay rent during retirement no matter which level of care you use. The facilities often require a sizable up front lump sum payment, with a reasonable monthly assessment. Payments made to a continuing care facility are typically tax advantaged because you are pre-paying the cost of long-term care. In many facilities, independent residents are able to deduct as must as 35 percent of their rent that is above 7.5 percent of their adjusted gross income.
Once the retiree has bought in to a facility like this, they have locked in the cost of care for life (excluding inflation). Independent living services often include a meal a day and scheduled transportation. In these facilities, the worry and expense of taking care of a home (yard, and the like) are eliminated. The independent resident simply needs to get a renter’s insurance policy for their apartment contents. In many ways, this option resembles a residential college.
There are numerous lifestyle and financial considerations when evaluating a continuing care facility. For many, these residential communities are a great place to live into the golden years. When choosing the right continuing care facility for you, there are numerous resources including governmental and nonprofit. One non-profit that has been accrediting facilities since the mid 1960’s is CARF International (Commission on Accreditation of Rehabilitation Facilities)6. CARF International is an independent, nonprofit accreditor of health and human services. CARF has a provider search that you can use to locate accredited facilities in your area.
It’s advisable not to confront long-term planning challenges alone — you need family, friends, and trusted advisers. When examining your particular situation, contact a qualified financial adviser who can walk you through your options.
FPA member Jason Branning, CFP®, is a fee-based investment adviser and financial planner with CS Planning Corp. in Ridgeland, Miss. He owns Branning Wealth Management LLC and serves as a board trustee to FPA of Mississippi.
1 “Modern Retirement Theory”, Journal of Financial Planning’s Retirement Distribution Supplement, December 2009. Copyright Jason Branning and Ray Grubbs.
2 Georgetown University Long-Term Care Financing Project, May 2003.
3 MetLife Mature Market Institute®, Purchasing Long-Term Care Insurance: Ten Key Considerations for Consumers.
4 Kassner, Enid. Long-Term Care Insurance Fact Sheet. AARP Public Policy Institute. June 2009
5 Tumlinson, Anne, Aguia, C. and Watts, M. Closing the Long-Term Care Funding Gap: The Challenge of Private Long-Term Care Insurance. Kaiser Family Foundation. Page 6 June 2009.
6 CARF International: Provider Search & Who We Are