The Rising Cost of Not Having a Plan
Perhaps the number one issue I see while traveling the country delivering my “Don’t Worry, Retire Happy” client seminar, is the lack of long-term care planning. It is the one thing clients haven’t prepared for that could WIPE OUT their entire life’s work!
As standards of living rise around the world, we encounter a time when medical research and treatment breakthroughs are expanding exponentially. These breakthroughs are exciting and create optimism for the future but they come with a price. Guess what? Someone is going to have to pay that price. The older clients get, the more likely they are going to need assistance with their medical situation or activities of daily living. When looking at the current options available to Americans to control these costs in retirement, most people don’t have anything beyond Medicare/Medicaid. Will that be enough? Let’s take a look at what’s in store for the health of today’s retirees and pre-retirees if they don’t have a plan.
There is currently more than $1.1 trillion in unfunded liabilities for the future promises of Medicare and Medicaid. It’s been more than 50 years since Medicare and Medicaid were signed into law by President Lyndon B. Johnson. When they were created in 1965, half of the people age 65 and older did not have basic health insurance, and a third lived in poverty. In 1963, there were 17.5 million Americans who were 65 or older. By 2015, that number increased to over 60 million Americans. And by the year 2030, experts indicate that nearly 80 million people will be eligible for Medicare. Medicare is health insurance. It is not long-term care insurance. So, if you need surgery or have to go to a hospital, Medicare covers most of it. But if you need assistance with activities of daily living or custodial care, If your clients are still on the fence about making LTC a part of their retirement plan, tell them not to do it for themselves, but to do it for their families and friends.
Medicare only covers 20 days. It will cover a portion of the costs up to 100 days but after that time – you are on your own. Also, you had to be in the hospital for at least three days to qualify for that limited benefit.
Medicaid will cover long-term care costs but to qualify, you must be destitute. Medicaid is a welfare program. As with most government programs, you lose control of your options. You cannot stay in your home, you cannot pick which facility you want, who your roommate will be, etc. At this time, the federal government pays 57%, on average, of Medicaid costs, and state funding covers the rest. How’s the federal government budget looking these days? Right now, we are looking at $20 trillion in debt and increasing over 2 Billion every single day. This is unsustainable. My point is that if your clients are counting on the federal government to take care of their medical and long-term care costs in retirement, they will likely be very disappointed. Most will find out too late. Although Medicare and Medicaid are valuable programs for many people, they are not a good long-term care option except for the very poor.
Now that we have reviewed the government’s plan for your clients’ retirements, what is their plan? Once they have covered their basic expenses with guaranteed lifetime income, they need to make a list of their other priorities and remove other retirement risks. Remember, retirement is all about income and risk management. Making sure that your clients are prepared to cover their long-term care expenses is important for their happiness in retirement. What would happen if a client needed full-time, around-the-clock care to help them live their life? What would that cost? What would happen to their spouse and family? Unless a client can pay for this expense themselves (or they qualify for Medicaid, which occurs only when a person is destitute), they should probably consider purchasing some form of long-term care insurance (LTCI).
According to AARP, only 8% of Americans have some form of LTC coverage. What are the other 92% going to do? There are three options…
- Pay for LTC out of your own assets
- Go it alone with no plan
- Transfer that risk to the insurance company in some form of LTCi or a life insurance policy or annuity with an LTC rider
If a client chooses option #1, they are likely to not live the retirement that they have dreamed of. Going this route could change the course of retirement for them and their spouse. The retirement savings that was supposed to last for years of line dancing has been spent on assistance in just trying to live a normal life.
If they decide on option #2, it’s unlikely that this will work, but the odds will be against them. About 70% of Americans will need some form of LTC before they die. If they don’t have a plan to pay for these costs, the results could be devastating.
I would recommend funding your clients’ LTC through some form of LTCi. Long-term care insurance can pay for services that include: home care, adult daycare, assisted living facility, nursing facility, or hospice care.
If your clients are still on the fence about making LTC a part of their retirement plan, tell them not to do it for themselves, but to do it for their families and friends. Having a plan for LTC allows your clients to have financial independence and dignity while protecting their spouse from enduring financial strife. Long-term care costs are one of the many risks that retirees and pre-retirees forget about that can completely derail their savings. The challenge with long-term care insurance is that the premiums have not remained stable and many people have had significant, unplanned premium increases. Additionally, if they don’t need long-term care, those premiums are gone. Many clients don’t like that – they feel their money was wasted.
Another, increasingly popular option is to buy a life insurance policy with a long-term care rider. These premiums are guaranteed to never go up and the policy can be used as an emergency fund, a source of funding for long-term care, and if long-term care is not needed – a death benefit for the family. Because of the multiple uses of this type of policy and the guarantee of the premium, many advisors and clients are finding it fits their situation.
More recently, annuities have also added long-term care riders that can double or even triple the guaranteed income in the event of a long-term care issue. With both life insurance and annuities, it is important to know what is covered and what is not covered. Some require a nursing home stay and will not pay for home health care. Others will. There are other limitations on the income of some of the annuities so know what you are selling and make sure your client knows what they are buying. The important thing is to have a plan. And I always say: “Any plan is better than no plan.”
Tom Hegna, CLU, ChFC, CASL, is an author, speaker and economist and host of a popular public television show. As a former Fortune 100 senior executive, Tom has dedicated his entire career to helping retirees obtain a “happily ever after” retirement. He has been featured on FoxBusiness, American College Wealth Channel Magazine, Round the Table, Advisor Today and GAMA Magazine. Tom is also a retired U.S. Army Reserves Lieutenant Colonel. He currently lives in Arizona with his wife and children. For more information on Tom Hegna visit www.tomhegna.com.