Mind on Money: Planning for long-term care

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Recently in my practice we have been assisting many clients with the transition to assisted living or long-term care facilities.

Once a family experiences this type of transition with an elder parent, the idea of planning for the possibility of a future long-term care situation becomes much higher profile in everyone in the family’s financial plan. So, over the past few months my practice has also been doing more long-term care planning for clients in their 50s and 60s, but interestingly in these planning situations, rarely do we use long-term care insurance.

Having many hundreds of client families, my team has worked with dozens of families that have had loved ones transition to long-term care type needs, and at this point I feel like I have a wealth of real-world experience going back 27 years on this topic. So, I will share some broad insights.

I’ve observed long-term care is typically needed in the latter half of the 80s. Also, in my experience, the sequence of events leading to additional care needs is often related to an elder living independently at home until an acute incident occurs or observable diminishment of faculties becomes undeniable.

In situations driven by an incident, the situation is typically triggered by an injury or acute illness. The incident leads to skilled care rehab, which is covered by Medicare, and at the end of rehab (usually 30 to 60 days), the family decides the elder would be better suited to an independent or assisted living facility. Assisted living facilities in Northwest Indiana typically cost about $4,500 to $6,000 a month. Interestingly, I have also observed that 20 years ago costs were $2,900 to $5,000 a month, so prices have experienced inflation but not exponential levels of inflation.

I have further observed, the assisted living period typically last for 3-7 years and then the individual either passes, or progresses to skilled or memory care, which can cost $8,500 to $12,000 a month. These prices too have only nominally inflated in the last 10-20 years as well. If the individual progresses to skilled or memory care the stay is typically 3 to 18 months before they pass (usually around age 87-93).

The diminishment of faculties path is a little different. In a spousal situation with children or other support in the area, someone with a diminishment of faculties typically stays at home for most of their care period. Sometimes the couple will move into an independent or assisted living facility to help care for the diminishing spouse, and sometimes home health care is brought into the family home for the same purpose. Costs are similar to those above ($4,500 to $6,000). As the person’s faculties get to the point where the spouse or children are unable to provide care at home, the diminishing individual will move to memory care ($8,500 to $12,000 a month). Usually, the stay in memory care is 3 to 18 months as well.

So, bottom line. In today’s dollars most families can develop a care plan for most of the elder care years in the $4,000 to $6,000 a month range. Even if we assume some inflation in this area by the time people in their late 50s and 60s are likely to need care, we model costs of $6,000-$10,000 a month.

It may seem self-evident, but people needing care don’t tend to spend a lot of money outside the home. So, if the family home is still owned, in my experience it is likely paid off and costs the family about $1,500 a month to own. The couple will have one or both Social Security benefits, so base income coming into the house for a typical family will likely be $2,500 to $3,500 in Social Security. So, if we assume costs of future care being $8,500 a month, and income being $3,500 a month, in order to sustain this cost structure the family would need about $1,300,000 in assets in their late 80s to sustain a care period without materially “spending down.”

While this may seem like a lot of money, when retirement accounts, family homes and other assets are projected with nominal growth over 20 to 25 years, this type of net worth is achievable by many middle class families. Once we explore the math, often the need for expensive long-term care insurance is alleviated, and the family chooses to prepare for this potential risk in other ways.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.