Financial Planning Blog

As these recent NPR segments discuss, baby boomers are becoming increasingly aware of the financial risks that long term care poses, both for their parents and for themselves. As they assist their parents in dealing with the emotional, logistical, and financial burdens of long term care, boomers cannot avoid pondering how they will personally cope with these challenges in the future. When you consider the probability of requiring some type of long term care, and its increasingly high cost, it is easy to get overwhelmed. However, instead of just worrying about long term care, do something constructive--make a plan.

Let our advance worrying become advance thinking and planning--Winston Churchill

A critical first step of your planning is to understand what coverage you may already have for long term care expenses. Although many people are mistaken (or deluded) that Medicare will cover most of their nursing or home care costs, this isn't really the case. Medicare will cover 100% of the first 20 days in a nursing home, along with an additional 80 days subject to a significant copayment. This is has proven to be substantial benefit for a great many people, but it isn't a long term long term care financing solution. Medicare's coverage of home care is more open-ended, but has definite restrictions. For example, the patient must have a need for "skilled care", not simply assistance with the activities of daily living. Your private health insurance and Medigap supplemental policies may also provide limited coverage in the early days, but also are not long term solutions.

That's it--after the first few months of care you need a plan for paying for any potential long term care needs that may arise. If you are single, planning is fairly straight forward, although not necessarily easy. Ignoring for a moment the possibility of families providing care for one another (i.e. the old fashioned way), the financial resources most people can call upon are limited to the following:

• Monthly income from Social Security, pensions, and lifetime income annuities
• Investment assets, including your home equity
• Veterans long term care benefits
• Private long term care insurance

Look closely at your available resources, and consider whether they will be sufficient to provide adequate care for you, should you need it at age 70, 80, or even 90. For example, your retirement income may not be able to cover the entire cost of assisted living or nursing home care, but it will cover a percentage. Next, you may want to set aside a portion of your investment assets specifically to cover any potential long term care--promising not to spend it on vacations, new cars, or whatever. Alternatively, a reasonable plan may be to sell your (presumably paid off) house, using the equity to pay for your care. Finally, you should at least consider the purchase of long term care insurance, allowing you to transfer the risk of future LTC needs to an insurance company, at the cost of a predictable annual premium.

Planning for couples, however, is more complicated. Although couples have the distinct advantage of providing care for each other in many situations, they face the added risk of a surviving spouse being left financially insecure after an expensive long term care episode. When outside caregivers are eventually required, whether at home or in an assisted living or skilled nursing facility, a couple's financial assets can become quickly depleted. Whereas a single individual can plan to use the entirety of their retirement income and financial assets to pay long term care, a couple cannot afford to do this. The person not receiving care still has income needs, still has housing needs, and will still need to draw upon the financial assets for what could be many years into the future.

We are naturally concerned about our spouse's welfare should we predecease them. Besides leaving a spouse emotionally and physically exhausted, the possibility of leaving our spouse financially destitute after paying for long term care is a risk none of us should willingly take. For this reason, it is all the more critical for couples to either set aside dedicated financial assets for long term care contingencies (i.e. self insure), or to purchase sufficient long term care insurance.

Besides relying on your retirement income, financial assets, and insurance to deal with long term care contingencies, there are at least two other potential options--family members and government assistance. If there are family members willing and able to care for you as you require, this is may be a viable solution. Caring for an aged parent is an undertaking deserving of much honor and respect. However, if you are counting on children to step up to this task, please discuss this possibility with them long beforehand. Your children need to be aware, and possibly plan for this potential. Also, consider the possibility that circumstances (e.g. divorce, health, finances, etc) may preclude the option of your children providing care.

Finally, there is a backstop of government assistance for long term care. Medicaid now pays for over 40% the nation's nursing home expenditures, and over 30% of home care. With federal and state budgets stretched to their limits, Medicaid simply cannot continue to be the long term care financing solution for the middle class. If you care about keeping your taxes low, and are disturbed about government spending and debt, Medicaid should not be your long term care plan. And, if you are concerned about the best quality care you or your loved ones, Medicaid should not be your preferred long term financing solution.

Instead of worrying about the future and possible long term care, do something constructive--make a plan. Discuss the alternatives with your spouse and other family. If you need assistance, consider consulting a fee-only financial planner--someone who will objectively assist you to evaluate your options, not sell you a product. Facing these issues may not be pleasant and may take some effort, but hopefully this preparation will result in less unproductive worrying, and more peace of mind.