Alzheimer’s-Proof Your Retirement Savings With Long-Term Care Insurance
My dad, Jim, passed in 2016 at age 85 from Alzheimer’s-related complications. At the time, he had been in a nursing home for almost four years. (For more details, see “Jim’s Story.”)
Nursing-home costs vary by region. There are also price differences that depend upon offered amenities and services. However, on average, it is not uncommon for nursing-home care to run in the ballpark of $75,000 to $150,000 annually.
At a middling $100,000/year level, a four-year stay (as my dad had) would come to $400,000. This could easily devastate your – or your surviving spouse’s – retirement plans. Additionally, once an estate is spent down, it can be difficult or impossible to leave a legacy to your children or grandchildren.
Sadly, my family discovered this all too well.
Jim’s Case
My dad retired from Sears (he always called it “Sears Roebuck”) after nearly forty-five years of service. At first, he worked in display. This was back when department-store displays were impressive and custom-assembled setups. Jim was trained in glass cutting and other skills that are now largely lost, in a time when what brick-and-mortar stores are left typically have pre-fabricated displays crated in from corporate headquarters.
Ultimately, he ended up in “maintenance.” A lot of the creativity was gone from the job that he had originally entered. Especially towards the end of his working life, he didn’t make much, salary-wise.
It’s probably safe to assume that he brought in around $20,000/year. At age 65, when he retired, Jim had around $300,000 from his Sears profit-sharing plan.
For illustration purposes, let’s think of this $300,000 as a well of money that can be drawn out a little at a time. There are ways of using the money (for example, to purchase an annuity) that do not consist in treating it as a pool. But we will put that to the side, presently.
Now, abstracting away from niceties like cost-of-living increases and supplemental incomes (like from Social Security), let’s consider three sample scenarios.
Three Hypothetical Situations
- Firstly, imagine No-Change Jim. No-Change Jim wants his retirement years to be the same as his working years – no change in lifestyle. A conservative assumption would be that Jim needed most (if not all) of his $20,000/year income to pay expenses. So, drawing $20,000 from our well of money every year, No-Change Jim would deplete his $300,000 in fifteen years.
As stated, and in fact, the real Jim retired at 65 and died at 85. But, for the moment, put aside the fact that the real Jim got Alzheimer’s Disease around the age of 75.
Drawing off $20,000 every year, No-Change Jim would have had fifteen years of money. That would have allowed him to live, with “no changes,” to age 80. If No-Change Jim had lived to age 85, as the real Jim had done, he would have run out of money five years too early. This is even on a “best-case” scenario where No-Change Jim never needed any extra money for emergencies (like needing a new roof or needing nursing-home care). No-Change Jim cannot really have “no change” after all. He has major problems by age 80. Additionally, No-Change Jim was “locked” into the spending habits he had when he was working. $20,000/year would have kept him where he was at, financially, but would not have provided any funds for any retirement-specific activities (like, say, traveling to Europe). So, No-Change Jim can keep going for a while in the lifestyle to which he had been accustomed. But he can’t keep going until the end of his life. What will No-Change Jim do at age 80?
- Let’s modify some of our assumptions. Think of a man that we’ll call “You-Only-Live-Once Jim.” YOLO Jim values enjoyment above being conservative. YOLO Jim wants to do some traveling with his new-found free time. To be sure, there are extreme versions of YOLO Jim where he takes the $300,000 in a lump sum, pays the taxes, and then blows the remainder on a few purchases. But let’s remain tethered to financial conservatism in some respects. Suppose that YOLO Jim simply wants to keep his overall lifestyle the same as it was while he was working, plus add on a $10,000 vacation each year (or build a “man cave” with a nice entertainment system, or whatever). To keep his pre-retirement lifestyle, we have seen that he requires $20,000/year. But to add on his desired vacation (or whatever), he needs an extra $10,000/year. That brings us to $30,000 each year. With $30,000 being drawn off every year, YOLO Jim’s $300,000 would have lasted him ten years. Again, holding fixed real Jim’s ages of retirement and death, YOLO Jim would have run out of money at age 75. YOLO Jim could have been “living large” for a while. But it catches up with him. How is YOLO Jim supposed to survive the last ten years of his life?
- Maybe there’s a version of Jim that thinks through possibilities 1 and 2 and wishes to avoid them. This hypothetical Jim does not want to outlive his money. Let’s call this man “Frugal Jim.” Frugal Jim faces head-on the fact that he cannot spend money on retirement trips (or man caves). Moreover, Frugal Jim realizes that – spending-wise – he cannot even keep leading the life that he was leading prior to retirement. $20,000/year is too much to spend. Therefore, Frugal Jim gives himself a pay cut.
Now there are two subtypes of Frugal Jim that I want to look at. One can see the future with his crystal ball, and the other cannot.
Crystal-Ball Jim can be frugal, but can also minimize his pay cut. Still leaving the Alzheimer’s aside, Crystal-Ball Jim knows that he will die at age 85. Since he retires at 65, Crystal-Ball Jim knows that he needs income for the next 20 years. By simple division, Crystal-Ball Jim takes his $300,000 and divides it by the 20 years he knows that he will live, and arrives at the figure of $15,000/year. So, he gives himself a $5,000/year pay cut. Presumably, this will mean that Crystal-Ball Jim needs to cut expenses somehow. But, suppose it’s possible. With $300,000, Crystal-Ball Jim could live out his life on $15,000/year.
But, clearly, few people would claim to have the requisite knowledge of the future. So, let’s envision a version of Frugal Jim without a crystal ball. Unaware Jim doesn’t know that he will die at 85 (we’ll continue to assume). Unaware Jim only worries that he will outlive his money and that believes that he needs to scale down his expenses in order to protect himself against that outcome. As with YOLO Jim, there are extreme versions of Unaware Jim who scale back so radically that they practically (or actually) end up living on the streets. But, once again, we will commit ourselves to minimalism, change-wise. Since he doesn’t know that he will die at 85, our version of Unaware Jim decides to plan to live until 90. So, our version of Unware Jim wants to ensure that he has income to live on for the next 25 years. $300,000 divided by 25 gives us the amount that Unaware Jim has to be able to live on: $12,000/year. Supposing that Unaware Jim manages to eke out an existence on $12,000/year, he spends $240,000 over the next 20 years, dies at 85, and leaves $60,000 as a legacy (of which, a portion will be paid in taxes).
How Much Money Do You Need to Retire?
What’s the “moral” of these various hypothetical case studies?
The first thing that jumps out at me is this: My dad didn’t have enough money to retire! Financially, retirement had been inadvisable for him.
Of course, there are seldom one-size-fits-all answers. Things like your assets, lifestyle preferences, location, and so on, all figure in any satisfying response. Your retirement goals (including your idea of what retirement consists in) plan a role as well. If your idea of retirement is to travel around the world, then you’ll probably need more money than someone whose idea of retirement has them living in a log cabin in an isolated part of the country. For an individualized answer, you should really address retirement-related questions in consultation with one or more trusted financial advisors – people to whom you feel comfortable disclosing your personal financial information.
However, general statements can be made. Current estimates suggest that the average worker needs upwards of $2 million to retire. The financial website TheStreet published an article in 2016 outline reasons for thinking that $2 million is the “new amount needed for retirement.” Previously, the baseline number was thought to be $1 million.
Citing the considered opinions of various investment and wealth managers, TheStreet author Ellen Chang contended that the $2 million figure is a “good goal” to aim at.
One Jon Ulin stated that each million saved could issue in an estimated income stream of between $30,000 to $40,000 per year.
It’s easy to see the difference that $2 million, or even $1 million, would have made to my dad’s case studies. Still thinking of the $1 million as a pool of money to be drawn upon (and not as the single premium on an annuity or as the base amount in an investment portfolio), we see that my dad could have drawn $25,000 each year and not outlived his money even if he would have lived to 100. Indeed, Jim could have lived on over $30,000/year and had enough to survive until the age of 90 – assuming that he never got Alzheimer’s Disease.
What About the Cost of Alzheimer’s?
By this point, you should be saying (and hopefully not screaming): “But he did get Alzheimer’s!”
And this is part of the point of going through the case studies. It’s hard enough to plan for a “normal” retirement. But even a person who had budgeted enough for him- or herself to carry a current lifestyle forward into retirement may find that Alzheimer’s blows that budget to smithereens. All the figures just covered assume everyday expenses only. We have not factored in the cost of Alzheimer’s care.
Given that male residents may spend between one to three years in a nursing home, and that females may spend between three and five years, estimated costs can be calculated for husband-wife pairs.
We said earlier that yearly nursing-home expensive range from $75,000 to $150,000. On the low end, if the husband spends one year in a $75,000/year home, and the wife spends 3 years at the same facility (whether concurrently or successively), that comes to $300,000. On the other hand, if a husband and wife spend three and five years, respectively, in a $150,000/year home, the total expense would be $1,200,000 (that’s 1.2 million dollars).
Of course, there are scenarios in which the husbands and wives spend more or less time and the facilities cost more or less than the costs sketched above. But this carves out a general estimated range for projecting Alzheimer’s-care expenses.
On average, we could say that total, estimated nursing-home expenses for Alzheimer’s-related care for a married couple run between $300,000 and $1.2 million.
Alzheimer’s is not the only danger to retirement funds. Any condition that results in the loss of two out of six “activities of daily living” (ADLs) or results in severe cognitive impairment can trigger the need for what is termed “long-term care.”
[See also “75 Questions to Ask a Doctor About an Alzheimer’s Diagnosis.”]
It is arguable, if not obvious, that my dad didn’t have the financial resources for normal, retirement-related expenses, let alone resources enough to afford long-term care.
In fact, Jim’s long-term care did cost around $75,000/year. This means that his care actually cost $300,000 over the four years that he ended up spending in a nursing home. He would have blown through his entire profit-sharing fund even if he had saved it, at its full value, until he needed full-time care in a facility.
A husband-wife pair with $1 million in retirement assets could reasonably plan to spend between $300,000 to $600,000 on long-term care, if they resolved only to utilize facilities that are on the low end of expenses, around $75,000/year. (As we have seen, 8 years of combined care in a facility costing $150,000/year costs $1.2 million.) This is between 30% and 60% of their available assets.
It may be a bit clearer why many writers are advising people to have $2 million put away for retirement.
A husband and wife with $2 million for retirement between the both of them might have to spend 15%-60% (if facilities cost upwards of $150,000) of those assets on Alzheimer’s, or other long-term, care.
Just working with $100,000/year, a married couple should probably budget $400,000 to $800,000 for their combined long-term care costs.
If you have around $2 million in retirement assets, could you afford to pay $400,000 to $800,000 for long-term care? Perhaps, if you could afford to pay for your other, pre-long-term care expenses with the remaining $1.2 or $1.6 million that remains.
However, there is another alternative.
Retirement Insurance
One alternative is to (try to) acquire long-term care (or “retirement”) insurance. There are different varieties of long-term care (LTC) insurance available. Presently, I will simply sketch a few of the basic concepts.
Two Main Types of Long-Term Care Insurance
In the main, there are two sorts of LTC policies. Number one, there are policies that only cover expenses occurred by an individual in a nursing home. Predictably, these sorts of policies are often designated nursing home only.
Number two, there are policies that cover a broader range of expenses. To understand this second sort of policy, usually referred to as a comprehensive plan, you should be aware of the range of possible care options (and attendant expenses).
- Adult Daycare – This is basically like a child day care. It is probably best described as a place offering custodial, recreational/social, and supervisory services to older adults who primary live at home, but are dropped off at the daycare center for limited periods of time. Not usually an option for people who require around-the-clock attention or are confined in some way, it may nevertheless be suitable for many families. For instance, if adult children take care of their aged moms or dads, but need a place to take them while going to work, then adult daycare may fit the bill.
- Assisted Living – Assisted-living facilities are a combination of senior housing and limited care services. You might take grandpa or grandma to an assisted-living home if he or she need some help with daily activities, but do not (yet) require skilled-nursing or 24-hour care.
- Home Health Care – As the name expresses, this option is for seniors who do not need institutional care because they are receiving help at their own (or someone else’s) home. The health plan may still include periodic visits from a skilled nurse who may perform various therapies and generally will be overseen by a physician.
- Hospice Care – During that unhappy time when the end draws near for a terminally ill individual, hospice-care personnel focus upon the comfort of the patient and the emotional wellbeing of the family. Nurses do not administer curative or remedial care, but try to minimize the patient’s pain. Hospice teams typically offer bereavement and counseling services as well.
- Nursing-Home Care – This is what may immediately come to mind when the subject of long-term care is broached. Nursing homes offer a mixture of custodial and skilled-nursing care. They are equipped to provide care 24 hours a day.
What Types of Care Do Long-Term Care Policies Cover?
The only type of care covered by long-term care insurance is custodial care. “Custodial care” refers to care administered in order to help people perform the activities of daily living or help people who suffer from debilitating cognitive problems (like severe memory and reasoning deficits). Custodial-care workers do not require medical training.
Skilled-nursing care, on the other hand, is only performed by a licensed nurse. The nurse will be depending upon an attending physician for the patient’s care plan. Usually, the phrase “skilled nursing” designates nursing care that is available around the clock, 24 hours a day, 7 days a week, 365 days a year. Long-term care policies do not cover skilled nursing care. It would be covered under health insurance, hospitalization policies, and Medicare.
On the other hand, neither healthcare plans nor Medicare cover custodial care! The only game in town for non-individual long-term care coverage is Medicaid. And Medicaid only covers people who are financially impoverished.
You might also run across the phrase “intermediate care.” This is also performed by a licensed nurse, under a doctor’s orders. However, this is less-than-24 care. It’s medical care, but it is not performed around the clock. Again, long-term care policies do not cover intermediate care. Health insurance, hospitalization policies, and Medicare cover intermediate care (which is often temporary, transitional, and ordered to support patient recovery).
Benefit Amount
Perhaps the most conspicuous consideration is the benefit amount. Generally, LTC benefits are paid on a dollar-per-day basis. So, your benefit amount might be $100/day, for example. Available benefit amounts typically range from $50 to $500 per day. Different companies will have different per-day maximums. Intuitively, the higher the per-day benefit, the higher the premium cost. All things being equal, the lower the per-day benefit, the lower the premium cost.
The average per-day cost for long-term care presently hovers around $200/day. At this rate, a $200/day benefit would cover 100% of expected costs, in today’s dollars, while a $100/day amount would could about half the anticipated costs. And so on. (Your own care experience may be very different. Again, this is for illustrative purposes only.)
Benefit Period
Another consideration is the benefit period. This is the period of time over which your benefit amount will be paid. Often, you can specify a benefit period something like 1, 3, 3, 5, or 10 years, etc. Similarly to what was said before, longer benefit periods translate into higher premium costs; shorter benefit periods generally mean lower premium costs.
Elimination Period
It was earlier briefly mentioned that long-term, or custodial, care has two “triggers”: one physical, one mental. Physically, LTC is triggered when an individual lacks the ability to perform two out of six activities of daily living. Mentally, LTC is trigged when an individual suffers cognitive impairment severe enough to require around-the-clock custodial supervision.
However, once one (or both) of these triggers is activated, the LTC benefit period does not begin until after the “elimination period” has been satisfied. An elimination period is sometimes characterized as a “time deductible.” It is the amount of time you must wait, after you are eligible for benefits, but before your benefit period begins.
Theoretically, the elimination period could be any arbitrary number of days.[1] It generally ranges from 30 days to 180 days. The shorter the elimination period, the higher the premium.
If your elimination period were 0 (zero) days, your premium payments would be extremely high. With a zero-day elimination period, your benefits would begin as soon as your need for long-term care is triggered.
If, to swing to the other extreme, your elimination period were 365 days (i.e., an entire year), your premium would be lower than it would be if you had selected a briefer elimination interval. However, your out-of-pocket costs would high. Essentially, a one-year elimination period means that you will be paying for your first year of nursing-home care out of your own assets or income. Since we already estimated one year of nursing-home care at between $75,000 and $150,000, these would be your expected out-of-pocket expenses before your long-term care benefit period begins.
Usually, people opt for something in the middle. 90 days is a commonly selected option. In this case, once you have triggered your need for long-term care, you would have to cover nursing-facility expenses out of your own pocket for three months and then your LTC insurance would begin paying your benefit amount.[2]
Three months of care at a $75,000/year facility would run $18,750. At a facility that costs double every year (or $150,000), your three-month cost would also double. In this case, that would be $37,500.
What Insurance Companies Offer Long-Term Care Insurance?
Here is a sample of companies that do, or did, offer long-term care insurance.[3]
- Genworth (Rated B by A.M. Best; B+ by Standard & Poor’s; and B2 by Moody’s)
- John Hancock (Rated A by A.M. Best; AA- by S&P; A1 by Moody’s; AA- by Fitch)
- Knights of Columbus (Rated A++ by A.M. Best; AA+ S&P)
- Life Secure (Rated D by Weiss)
- Lincoln Financial Group (Rated A+ by A.M. Best; AA- by S&P; A1 by Moody’s; A+ by Fitch)
- Mass Mutual (Rated A++ A.M. Best; AA+ by S&P; Aa2 by Moody’s; AA+ by Fitch)
- Mutual of Omaha (Rated A+ by A.M. Best; AA- by S&P; A1 by Moody’s)
- Nationwide (Rated A+ A.M. Best; Rated A1 by Moody’s)
- New York Life (Rated A++ by A.M. Best; AA+ by S&P; Aaa by Moody’s; AAA by Fitch)
- Northwestern Mutual (Rated A++ A.M. Best; AA+ S&P; Aaa Moody’s; AAA Fitch)
- One America (Rated A+ by A.M. Best; AA- by S&P)
- Pacific Life (Rated A+ by A.M. Best; AA- by S&P; A1 by Moody’s; A+ by Fitch)
- State Farm (Rated A++ by A.M. Best; AA by S&P)
- Thrivent Financial (Rated A++ by A.M. Best; AA+ by Fitch)
- Transamerica (Rated A+ by A.M. Best; AA- by S&P; A1 by Moody’s; A+ by Fitch)
Notes:
[1] There is also a finer-grained distinction between “calendar” and “service” days. When an elimination period is based on calendar days, the first day of a claim starts the clock and it runs continuously until the elimination period is complete. On the other hand, when an elimination period is based on service days, the clock begins when the claim is made and the individual actually receives care. If a given person only receives in-home care three days out of the week, then only three days per week will be counted toward the fulfillment of the elimination period.
[2] Note that you may still have out-of-pocket expenses even after the benefit period begins. In any case where your contractual per-day benefit amount is less than your actual per-day cost of care, you will have to pay the difference out of your own assets/income.
[3] I have done my best to report accurate financial-strength ratings (as of this writing). However, I offer this list for informational purposes only and make no guarantees or warranties. I encourage anyone who is considering the purchase of a long-term care policy to do his or her own research into a company’s financial strength and philosophy before making a purchase. Moreover, a would-be purchaser may find that Company A offers a better policy than Company B for your individual needs. In this case, it may make sense to favor A over B, even if B has a higher financial rating. You should seek professional advice.
