Thursday, January 27, 2011

The Scary Math of Long-Term Care

I had a post yesterday about needing income in retirement, so I thought I would continue the thought today.

There was a coach at Florida State named Bobby Bowden who coached until he was in his late 70's. When asked by reporters why he didn't retire, Bowden supposedly replied "There's only one other major life event after you retire, and I don't want to sit around and wait for it."

While Bowden was correct, what most people really have to plan for is the unfortunate fact that medical costs also increase in retirement. A serious illness requiring significant care can decimate the life savings of someone who may think they have sufficient assets to prepare for any eventuality.

On Twitter yesterday I came across a post that from a site called "MoneyMinded Moms". I had never visited the site, but they posted a chart that does a pretty good job of illustrating the challenge confronting even well-off retirees.

Here's the excerpt, with the full link below:

If care isn’t needed at a younger age, chances are greater than 60% at age 65 that we will require extended care at home or in a facility.1 A recent industry report shows that the average long-term care insurance claim is 2.8 years,2 but the caregiving time for Alzheimer’s or stroke victims can be many years. At the national average cost of almost $75,000 a year for ten hours of home care at $20 per hour, it doesn’t take long to wipe out a family’s assets.3 Take a look:

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What Are the Odds of Needing Long Term Care?

I think that most of us would consider a couple with $500,000 in savings to be pretty well-off, and yet this chart clearly shows how quickly these funds can be used up.

Moreover, if these funds are mostly in fixed income today, assuming a 4% yield (which is what the chart uses) is actually pretty aggressive. As I mentioned yesterday, most of clients are reluctant to buy bonds with maturities much longer than 5 years, and yields for investment grade securities in the 5-year sector are well below 3%.

What's the solution?

Unfortunately there is not one magic answer, but a series of trade-offs and alternatives. Long-term care insurance might seem to be one sound idea, for example, but some of the policies written today are pretty expensive for the coverage they offer.