How Will The Out Of Pocket Cost Of Long Term Care Impact My Retirement?
One of the first questions people ask when they consider long term care insurance is whether or not it’s worth it. Follow our Real Retirement Stories series and make your own decision.
Our first story is about a 67-year-old friend and client, "Tom" (not his real name), who decided that self-insurance was the smartest choice for his financial resources. He made a reasonable decision based on his long-term preparations for his and his wife’s retirement - but then life happened.
Tom’s Story
During a lingering and miserable two-year divorce, Tom suffered a heart attack followed by two open heart surgeries. The second surgery left him severely weakened and in pain. The surgeon recommended a rehabilitation facility for initial recovery. Tom did well there, and, when he was released, even began bike riding again. However, once fending for himself in his second story walk-up apartment, his recovery quickly failed. Embarrassed by his inability to cope, he stubbornly refused aid from local friends for months - until he collapsed.
After two long stints in the hospital within 6 weeks, the doctors would not approve his return to live independently in his apartment. Tom himself now felt unsafe living alone. The idea of moving to assisted living with “homecare” (personal help in his room) sounded very appealing. In spite of the severe shortage in the area, Tom was able to find a suite at one of the nicer assisted living facilities in town. The local park and pleasant shopping area added to the appeal and promised to be an excellent location for recovery. But it was costly.
Tom had prepared well for retirement, but due to his poor health, he was forced to access his retirement accounts earlier than planned. At that point, he only had half the assets he’d expected.
Breaking Down the Numbers
Unable to work, he was forced to empty several of his smaller IRA accounts. However, his decades of preparation could still provide a comfortable living of about $10,000 per month once he initiated the payments. Thanks to strategic use of annuities and regular payments to social security, this income is guaranteed for his lifetime. He also purchased a life insurance policy for tax-free cash up to $350,000 during his lifetime and a tax-free death benefit on any remaining value for his grandson. He wisely took inflation into account by taking advantage of the high growth potential of a diversified equity investment account. Although the market crash caused by the Ukraine war gave him a loss of nearly 20% on his investments, he still has about $300,000 in assets remaining.
The Cost of Assisted Living
Medicare specifically does NOT pay for “palliative care” (non-medical help with day to day activities) or even for recovery care longer than 100 days. In order to manage the cost of the suite, he had to move out of his apartment and place most of his household goods in storage.
He was able to take a tax-free loan from his life insurance policy to cover moving costs freeing up his guaranteed income to pay for his new lifestyle. Renting a 400 square foot suite costs him $5,500 per month and the basic personal care service costs $500 monthly. Storage of the household effects that didn’t fit in his suite costs $240 per month. Since most of his food, shelter, personal and medical care, internet, and parking are covered by assisted living and Medicare he still has almost $3,800 in income left. From that amount he pays for taxes, insurance, mobile phone, car maintenance and other basic expenses. That leaves him about $1,000 for “discretionary” items like clothes, medical expenses not covered by Medicare, gas, personal items, etc. Not exactly the lifestyle he planned on, but manageable.
The good news is that Tom is recovering. Thanks to careful preparation, he’s been able to weather this storm without emptying his main retirement accounts. Eventually, he’ll be able to move out of assisted living and, depending on the cost of his new residence, free up another $2-$3,000 per month to spend on the travel, hobbies and fun that he’d dreamed of for his retirement.
Next Steps:
For many people, recovery from a significant disability just isn’t possible. Without the protection of a long term care policy, dreams of a financially comfortable retirement can be crushed by the costs of long-term care.If you would like to explore your retirement plans for the resilience to handle life’s storms, book a time for a complimentary conversation about your unique situation.
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