The Biggest Risk in Retirement

What's probably the biggest risk retirees face? Is it the performance of the stock or bond markets? Is it inflation? Maybe spending too much or living too long? Or, how about the POTUS Twitter account? All kidding aside, the biggest risk isn't any of these, though each poses its own complications. As retirees look ahead and try to plan for a long, happy retirement, future long-term care (LTC) expenses are probably the biggest unknown factor and have the highest potential to derail an otherwise unsuspecting retirement plan.

With all these other risks, why are LTC costs so large a problem? Mostly this is due to the overall risk being a mash-up of different risks that are each fundamental and lack simple solutions.

The first is timing. Since we won't know in advance when you'll need care, and for how long, these expenses are hard to plan for. If we knew the need was, say, 20 years in the future, we could run the numbers to see how much cash you would need to set aside today, or save over time, to cover the future expense. We could allow for growth on your savings and it becomes a simple time value of money calculation. But then we also don't know how long you'll need care and what type you'll need. While the national average is about 2.5 years of care in a nursing home starting at age 79, this is skewed to the low-end by folks who only need shorter-term rehab stays. You may need much more time if you or your spouse ends up suffering from Parkinson's or Alzheimer's, for example. This and more makes the timing problem huge.

The second risk is linked to the timing problem, and that's inflation. According to the Bureau of Labor Statistics, from the six years ending November 2016, medical care prices were up about 20%, which was roughly double the period's general inflation rate of a little over 10%. Prescription drugs were also up about 20% and hospital services were up over 30%. With nursing home inflation averaging at these levels as well, the future cost of care can be staggering.

According to the state of California, the average annual nursing home inflation rate from 1980 through 2010 was 5.8%, and this doesn't seem to have slowed down since. According to a 2016 Santa Rosa area cost survey by Genworth, an insurance company, the average cost for a semi-private room was about $108,000 per year, while a private room tipped the scales at $148,000. So, at a 5.8% average inflation rate, the private room would run $457,000 per year 20 years from now. Multiply that by your assumed length of stay and there you have it! For most people that's a whopper of an expense to their retirement plan.

A third risk pertains to the type of care you might need. While we can guesstimate this based on family history, the truth is we won't know in advance exactly what your future health (or cognitive) needs will be. You may only need a residential care/assisted living facility, and for that the average cost was about $53,000 in 2016, also according to Genworth. Perhaps home-based unskilled care would be needed for a while before moving into a residential facility. This costs about $62,000 per year for someone full time. Or, you might only need a person for a few hours a couple days a week to provide help with cleaning the house, going shopping, even dressing and bathing. This costs about $28/hr locally from an agency, or a little less (bust risky) through Craigslist. You may also be able to leverage family members to provide unskilled care for as long as possible. In truth, you might end up engaging all these levels over time as your needs change.

So, what is one to do about the risk of LTC costs derailing their retirement plan? Unfortunately, there is no simple answer. You can buy LTC insurance, either as a standalone policy, or as a rider on life insurance or an annuity. Each of these can help but they are not a panacea. The reason is that premiums are often prohibitively high and, if you do the math and try to account for the risks mentioned above while adjusting for premium increases, the policies don't necessarily buy you that much beyond prudently saving your own money.

In practice, those who currently have LTC policies should keep them. But for those who don't, detailed planning and analysis is critical to ensure the new policy pencils out. Part of the reason for this is the LTC insurance industry is struggling with how to price these policies. As more policyholders keep the coverage they have, and then start using it, the policies become less profitable for the company. Add to this the low interest rate environment and the cost inflation mentioned above and you have a situation that is not favorable for LTC insurers.

For many folks in retirement who end up needing some amount of prolonged care, either in a facility or in their home, or both, it's likely going to come down to using their own assets to pay for it. You might end up leaning on your savings and investments, leveraging your home equity through a reverse mortgage, or even selling your home and downsizing to free up cash. The need for options makes current planning critical. A good retirement plan will analyze these LTC risks and look for ways to address them. The plan should adjust over time as you age and the likelihood of needing care increases. As is often the case, the best solution isn't a product, it's planning.

Have questions? Ask me. I can help.

Here's a link to the Genworth tool where you can look at the prices for different care options in different areas.

https://www.genworth.com/about-us/industry-expertise/cost-of-care.html