If we look back through history, we’ll note that caring & long-term care for those who became elderly or disabled was handled far differently than it is today. In the late 1800’s and early 1900’s, most people worked either on a farm or in a factory. People worked until they physically couldn’t, and then they would retire. They lived out their few remaining years at home, passing away typically within 10 years of retirement.
If they became sick, developed cancer, had a stroke, broke a hip, had pneumonia, etc., those illnesses or disabilities either lead to an imminent demise or the residual effects substantially shortened their life expectancy. The family unit was structured much differently then, relative to today. It was common to have 3 generations living within a few miles of each other, or potentially under one roof. So, caring for mom or dad (If they did become elderly or disabled), was easier. If there was a need for nursing home care, the inflation-adjusted cost was a fraction of what it is today.
How Does Long-Term Care Differ Today?
Virtually every aspect of the issues mentioned above are different today. People live far longer now than in the past; which makes us more likely to become infirmed and disabled. When we do become sick and disabled, medical technology is able to keep us alive far longer than in the past. When we need assistance, the family unit is smaller, much further dispersed, and far busier than in the past, which makes it harder to provide care. When it is time to go to a nursing home, the cost is not only larger than in the past, but so high that it jeopardizes our financial wherewithal.
For the first time in history, we have a generation of people who are living long enough to need a significant amount of care. Frequently, this may be more care than what family can provide. Because of this, the assisted living and home care assistance industries are booming. What this means to the consumer is more choices and better options than we’ve ever had before. But how do we pay for this?
Issues to Consider When Thinking about Long-Term Care
A vast majority of the financial plans we work with can survive a long-term care illness if care is needed after the age of 80. The real financial danger to your financial plan is if you or your spouse gets sick when you’re in your 60s or 70s, as the added cost of care can severely damage even the best financial plans. It’s this scenario of becoming disabled when you’re younger that we must guard against the most.
For many of your families, the thought of putting you in a nursing home is the last consideration; but the changes to the family unit in the last 100 years makes caring for you more difficult. It’s not as easy for family members to provide care, as the majority are either dual income, or single member families that work. In addition, family members have become more dispersed, frequently living in different cities or states, which makes providing care to sickly family members more difficult.
Traditional Long-Term Care (LTC) Insurance
The insurance industry created an insurance product, LTC Insurance. LTC Insurance will pay for care if you meet certain criteria. Although the premiums have gone up substantially in the last decade, it’s still a consideration. The main price driver to these policies is the cost of living inflation adjustment (COLA) that will keep the benefit growing over time. One solution is to purchase a policy with a large monthly benefit, but with no inflation rider. If you need care when you’re younger, this policy will be able to pay a substantial amount of the cost. If you need care when you’re older, the policy will pay a benefit, but not as large of a percentage if you became sick at a younger age. Policies without this COLA rider are much more affordable than ones with it.
Many people purchase Whole Life Insurance policies when their kids are young to replace income in the event of an early demise. After the kids are grown and the traditional need for life insurance diminishes, it’s possible to re-purpose whole life policies to address LTC. The simple scenario is to leave the policies intact, pay for any long-term care expenses out of pocket during your life and, upon your demise, use the death benefit of the life insurance as a means to replenish any end of life expenses incurred.
A second solution is to move the cash value of an existing life insurance policy to a new life insurance policy which has a long-term care rider. Frequently these policies allow you to access some multiple of the death benefit during your lifetime for LTC expenses. If you don’t need to access the policy during your lifetime for a LTC expense, your beneficiaries would receive the death benefit upon your death. Keep in mind that you would need to be reasonably healthy and insurable for the new insurance company to issue this policy.
Pay Out of Pocket
How to pay for care is another consideration. For most people, most of their assets are tied up in IRA/401k accounts and residential real estate. Remember, every withdrawal from retirement accounts is subject to Federal and State Income Tax. As a result, you typically need to withdraw $100,000 to pay for $70,000 of care; which means that your large retirement account won’t pay for as much as you think. As for real estate, you can always sell or refinance your home to pay for care; but this is typically an undesirable alternative.
If you’ve planned well and been able to save money in a brokerage account, this account is more tax-advantaged than an IRA. Even still, selling securities to pay for LTC care would typically generate capital gains taxes.
What does Assisted Living cost?
The cost of assisted living is generally determined based on two factors:
1) the actual cost of the care being provided
2) the size of the space that you wish to occupy
Let’s first look at the cost of care. You will see the charges for care assessed in numerous fashions. You may see a “flat rate,” where everyone living in a particular assisted living community pays the same rate, regardless of the amount of care that they receive. The philosophy behind this approach is that at different times throughout someone’s life, they will need more or less care, and this sort of fee allows for better financial planning. It also might feel a little better to the person receiving the care or paying for the care. No one likes to believe that they are being “nickeled and dimed.” Caregivers surely don’t want people to not ask for help because they think they are going to be charged every time they press their call button.
Conversely, you may see the cost of care charged based on points or levels. In either of these situations, the cost of care is charged based on the care that is required and the time that is required of the caregivers. This is a rather sophisticated assisted living industry approach. No one is walking around with a stopwatch in these situations, but over the course of time, time-weighted averages have been assigned to different functions.
Second, is the actual cost of the “real estate.” Commonly, a portion of the total cost is based on the size of the apartment or unit where someone lives. In assisted living communities, one may find studio, 1, and 2 bedroom apartments, and different rates will apply to each.
So at the end of the day, what does assisted living cost? On the low end, where an individual may not require much hands-on assistance and choose to live in a smaller unit, it’s possible to see rates as low as $4,000 per month. On a high end, where someone may have significant care needs because of physical frailty or advanced dementia, you may see rates as high as $8500 or more each month. (Please note these prices reference the metropolitan area and are Wisconsin specific.)
When seeking care for an elder, assisted living actually turns out to be one of the most economical ways to get care when a person needs it. The individual is no longer paying property taxes, paying utilities or buying groceries. These costs are included in their monthly fees and are essentially shared by all those living in the community. In addition, the care is something like a “caregiver share.” Each individual is receiving the care he or she needs but is sharing the cost of the caregiver with the others in the community.
Home care assistance, or non-medical home care, is another option in the right situations. Unlike assisted living, where the cost of the caregiver and the living expenses are shared across a number of individuals, someone who chooses home care assistance will continue to pay the cost of living in their home, as well as the cost of an individual caregiver. The hourly cost of care can be as much as $30/hour, and a daily rate for someone who needs 24 hour care or supervision can be in the $300-500/day range. Determining the most sustainable option is vitally important and will vary depending on an individual’s personal financial situation.
What if I run out of money?
Medicaid or Title XIX is a joint federal and state program that pays for long-term care in a nursing home or a skilled nursing environment, as well as healthcare, once a person has exhausted his or her assets. In Wisconsin, we use a part of our Medicaid budget to pay for long-term care in an assisted living community when someone outlives his or her assets. We call this program Family Care. Family Care is a smart choice that our leaders and lawmakers first piloted in Milwaukee County in 1999. Since that time, most counties throughout the state of Wisconsin have adopted the program.
Why is Family Care a smart program?
The cost of being in a skilled nursing home in southeastern Wisconsin ranges from about $10,000 to $14,000 per month. The fact is, most people don’t require the level of care provided in a skilled nursing home. The cost to be in an assisted living community ranges from about $5,000 to $8,000 per month. As private payers, that boils down to about half of the cost to care for our loved ones. As taxpayers, we are saving as much as 50% on the cost of caring for our elders when they need it. Essentially, we can pay for two people for the cost of one!
We’ve heard countless people joke about ‘alternative ways’ they would deal with LTC. Leaving your spouse at the curb in their wheelchair with a ‘Free’ sign draped around their neck in hopes someone would drive by and pick them up sounds funny when you say it, but the reality is no one would do this.
Understand that every person has a long-term care plan. For most, that plan is simply hope and a prayer. More important than the financial ramifications of getting sick, consider the impact on your family in trying to care for you. Even if your family is only coordinating caregivers, this task can be enormous. Speak to your family members about your plans and intentions if you get sick or disabled.
It is important to recognize that there are experts that can help guide you through the financial planning for long term care, as well as for the care itself. Contact Shakespeare Wealth Management with questions about how to create a sustainable financial plan. Talk with Vesta Senior Network about what options are available. Vesta has been in business since 2013 and has helped over 1,000 families come to the best solutions for their loved ones for Elder Care Placement in Milwaukee.
Article written by Pam Foti, Elder Care Advocate and Co-owner, Vesta Senior Network, and Kevin Reardon, CFP and President, Shakespeare Wealth Management