Long Term Care Planning

In today’s video, we are going to discuss the conversation around long -term care planning during retirement, whether to self -insure, when to know that you need to do some planning, and when you know it’s essential to have a plan into place.

Often a question we receive is around long -term care planning. You save your whole life, hopefully you’re able to retire and live a life by design. One of the big unknowns is if a healthcare event happens, how does that affect your financial security?

So today we want to break this down into three categories. One is when to know if you can self -insure. The second is the middle. Maybe you can self -insure, maybe you should consider some kind of alternative option.

The third group is when to know when you need to do some planning. How do we know when to self -insure? I typically see that self -insuring is an option depending on a net worth between $5 million to $10 million.

We use an exact formula of there’s been studies that have shown a 4% of the safe withdrawal rate and there’s dynamic rates where you can take more than that. If we use a 4% safe withdrawal rate, just an example of a $7 million portfolio, we’ll assume it’s a mix of Roth, regular 401k, or pre -tax IRA, and then a mix of regular stock accounts.

A 4% safe withdrawal rate would be $280 ,000 and after a blended tax rate would be about $225. Assuming this person needs to spend $150 a year and just an example, Social Security and Pensions are taking care of about $100 a year, that leaves a gap of $50 ,000.

We know the portfolio without touching principal, given normal market conditions, could produce $225 ,000. So out of that $225 ,000, $50 has to go to normal spending. and that leaves an additional $175 that could go to a long -term care event, which in addition to normal spending, if a one spouse needed this care, generally we see care on average cost about $10 ,000 a month.

It can cost much more than that if you’re in a nicer home depending on what state you live in, and it can cost much less than that if you’re receiving home health care, for example. In this example though, the portfolio by itself would fully cover the normal expenses, and it would fully cover the long -term care cost as well.

We don’t see insurance being a need here. We do see insurance maybe being a tax -efficient way to cover the cost. In this kind of scenario, a hybrid life insurance and long -term care insurance policy would work because no matter what you’re not wasting the money.

If you die, your spouse or your kids will get the money. If you need the long -term care, it will come out completely tax -free and it will avoid a higher tax bracket. For a married couple, they would have a runway of 10 to 24% up to 321 ,000 of income.

And if this long -term care event got added on in addition to their normal spending habits, that would surge them into a 32% tax bracket in today’s tax environment. A hybrid policy would allow you to take that money out, pay for the long -term care, and do so in a tax -free environment.

Regardless, if your excess of interest over what you need to spend on the year -to -year basis based upon that 4% safe withdrawal rate, we see you are able to self -insure. The reason I give a very general $5 to $10 million range is because we don’t know your spending habits.

We do know your spending habits on an individual basis, but this is a video in general. The middle ground would really be that $2 million to $5 million range. If that 4% … I’m just going to use $3 million as an example.

If that 4% is $120 million, and the same example where someone spending $150 a year and they in social security and pensions are given $100, $50 has to go to spending patterns, and $70 would be left.

Well, long -term care costs, it would cost more than $70 ,000 if you’re in a nursing home. That means we’re a roding principle, and we’re doing so at the higher tax rate, potentially of 32% or higher.

In this case, the need for long -term care planning goes from being a want to more of a necessity to make sure your spouse is protected, or to make sure if there’s an intended inheritance to make sure that that is protected as well.

When we see a net worth and retirement between about half a million dollars or two million dollars, this becomes more of a needed discussion. Do we plan to use assets because we don’t intend to have an inheritance if so, how do we protect some of those assets for our spouse?

How do we maintain tax efficiency if we’re using portfolio assets? Do we do a standalone long -term care insurance policy? Do we do a lump sum into some kind of hybrid policy? All viable strategies. Do we hide assets by gifting them to a trust five years in advance of when we think we would need to rely on this money so our beneficiaries are protected and then try to qualify for Medicaid?

Obviously, it doesn’t provide the quality of care you would hope for during your retirement years. All discussions, and this is where it becomes a necessity to have a plan in place. It doesn’t mean you need insurance.

It doesn’t mean you need a trust. We just need to stress test and know your priorities and make sure that this event is covered in all circumstances. If someone were to spend their assets, 100 days gets paid by Medicare, 30 in full and 70 partially.

Then you go through your assets and then you qualify for Medicaid. When we hear the old adage of how do we protect our assets, it’s a catch 22. If you want to protect your assets so the government doesn’t take them, that means that you don’t have any money to cover the long -term care.

That means Medicaid is covering the cost and the government decides what kind of quality of care that you qualify for. And unfortunately, I’ve never met someone happy about sending their parents or grandparents to a Medicaid -run facility.

Luckily, they’re there for a reason and the care is there, but when you’ve worked hard your whole life to accumulate assets, the dignity and quality of your care is of utmost importance when you do retire.