If we have learned anything over the last few years of the pandemic, it is that the care of loved ones in an institutional setting can be problematic. In recent times it has taken a toll on both family members and those needing care alike. The most common themes are cost, access, and control.
There is a lot of data out there, but most of it is told from a sales perspective:
- The AVERAGE stay for males in a nursing home according to Morningstar is 18 months.
- The AVERAGE stay for females in a nursing home according to Morningstar is 30 months.
Genworth reports that for the state of Connecticut, the following costs can be expected:
- Homemaker Services: $172/ Day or $5,243/Month
- Home Health Aide: $176/ Day or $5,339/Month
- Adult Day Health Care: $85/ Day or $1,842/Month
- Assisted Living Facilty: $169/ Day or $5,129/Month
- Semi-private Room: $453/ Day or $13,764/ Month
- Private Room: $499/ Day or $15,170/ Month
So, these numbers seem big… these numbers seem scary, and if we apply them incorrectly, we can wind up seemingly spending a lot of money protecting against these risks. The question is do we design a plan for the worst-case scenario or the most likely?
Based on the stories I have seen over the years from clients, and their parent’s experiences, I started to do a little research to see how we arrive at the “averages”. Understand that an average is a way to distill statistical variation down to a number. In the case of the 18 month number, if one person has a 6 month stay and another has a 36 month stay, the two average together to 18 months. Note that in that set of data, the 18 month average does not actually occur in reality.
Understanding that, I went on a quest to see what is underneath the numbers. After a little bit of clicking on the internet I stumbled on a paper from the Journal of the American Geriatrics Society from 2010. They studied 1,817 residents of nursing homes between 1992 and 2006. Here are some of the facts that emerged beneath the data.
- The average age of a person who passed away while receiving care was 83.3 years old, almost 60% were Female.
- The Median (this is the middle number that actually occurred, not the average) length of stay was 5 months. 53% passed away within 6 months of placement.
- This study found that the overall average length of stay was 13.7 months, however they determined that a few outlier patients with long lengths of stay drove the calculation of that number to be higher than the median. (If you look at the graph from the study it becomes evident.)
- The majority of residents had short lengths of stay, with 65% with a stay of less than one year, and 53% less than 6 months.
- Married patients spent on average 4 months less in care than those who were unmarried. It was not addressed in the study, but I am willing to guess that these individuals got care from their spouse at home longer before going to an institutional setting.
- Households with a net worth greater than $150,000 had average lengths of stay 6 months shorter than ones that had less.
So now that we understand the true risks and how they trend, now we can figure out how to plan. The following is the underpinning of our planning process.
- Understanding the risks of self-funding. There are two main risks here, positioning and volatility.
- If you plan to self-fund, will your investments be at peak value when the incident occurs. As we have no control over volatility, we do not have a way of knowing if that will be the case. One major market correction can impact that substantially.
- Positioning risk has to do with how much of your assets are in deferred retirement accounts like IRA and 401k. If you need to draw more heavily on these accounts due to an issue, you will then wind up paying more in taxes. For example, if you are in the current 22% tax bracket, it would take $76,000 of withdrawals to do that. So, taxation is as much a problem as the event itself.
- Planning for likely outcomes and unlikely ones. What this data reveals is that there is no magic bullet to fix this. We need to plan for what is likely and also for the worst-case scenario. Underlying this is the fact that suffering an LTC event early in your retirement and the funds that it consumes are much harder on the finances than suffering it later in life.Incurring that kind of cost in your early 70s uses up funds quickly that your spouse may need to rely on later. In addition, your length of stay will likely be longer according to the data than later in your 80s.
- Understanding Risk Transference.The whole point of insurance is to have an insurer take assume some of the financial risk by paying premiums. The question becomes how much of the risk to transfer, and via what mechanism. At the end of the day, transferring all the risk is more costly than transferring only some of it. If we design a plan properly it will involve determining how to transfer this risk.
- Funds used in a traditional LTC policy are completely dedicated to that purpose.Typical policies do not offer a death benefit, or a refund of premium if not used (there are some carriers that do, but with increased cost).As a result, there is little flexibility if needs change or if due to immediate death or short term stay the balance of benefits goes unused.
We have found that considering all these things, a layered approach works best. Utilizing specific products to deal with specific issues is the best way to handle this. In addition, since stays are shorter, a product specifically oriented to that fits the bill best. It turns out that tackling that specific issue is much cheaper and less likely to have cost creep vs. the monster LTC policy.
We can then develop a layer of protection that economically takes care of what could be long-term needs. There are multiple different solutions here based on a variety of factors. All of these solutions are variation on insurance products and either includes LTC Riders, or Chronic Illness protection. In many instances premiums can be guaranteed in these products, so the concern about escalating premiums and keeping the contract in force is diminished.
When you consider annuities, you might be thinking that some might have features that can assist with this sort of planning. You would be right. Sometimes you might keep a sum of money dormant to grow and provide those income benefits when needed. Other companies provide product specific features and riders to aid with that protection. I personally love to come up with ways to solve this problem, as just buying pure insurance is either an income drain or can be a serious commitment of assets.
I have not yet met a client who had a perfect plan for Long Term Care, the cost would scare anybody. Typically, we try to design something that is reasonable, but still has multiple functions. It’s like a Swiss Army knife, but for your investments. I came up with this philosophy based on the advice I got from an old engineering manager that always used this phase… “A half-baked something is better than a fully baked nothing”.