LTC Part 1: A Step-by-Step Process to Determine if You Can Self-Fund for Long Term Care
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Welcome to the Stay Wealthy Podcast and welcome all of our new listeners. I'm your host, Taylor Schulte. And before we get into today's topic, I have three important things that I want to share.

First, I want to extend a very big public thank you to Jeremy Schneider for guest hosting last month. I'm constantly amazed by Jeremy's kindness and generosity and just truly grateful for his help these last five weeks. Publishing and producing five podcast episodes is no small feat, and I think he did a tremendous job. I hope you guys really enjoyed your time with Jeremy. So please be sure to check out his Instagram account at personalfinanceclub.com.

and his brand new online course, How to Build Wealth by Investing in Index Funds. And speaking of Jeremy's course, the second thing I wanted to share is that I've secured 10 course registrations to give away to our listeners for free. To claim one of the 10, all you have to do is leave an honest written review of this podcast, not just a star rating, but a written review of this podcast in the Apple Podcast app.

Take a screenshot of it and just email it to podcast at youstaywealthy.com. Now, if you don't have an Apple device, either borrow your neighbor's or just get creative and find a way to share this show with your friends and family. Maybe, I don't know, share a link to the show or your favorite episode on Facebook and send a screenshot to podcast at youstaywealthy.com.

To be fair to our West Coast listeners that listen and tune in a little bit later than everybody else, I'll wait until the end of the day and I'll draw 10 names at random from the screenshots that I receive.

Last but not least, as you might have heard, my wife and I, we welcomed our little baby girl last month. Our two boys are officially big brothers to their sister, Cece May Schulte, and we are officially done having kids. So thank you to everyone who sent messages and reached out. I really appreciate all the support and I look forward to sharing more photos of little Cece soon. So if you're on our email list, keep your eyes out. Okay.

Okay, with all that out of the way, today on the show, I'm kicking off a two-part series on long-term care. As Stay Wealthy listener Michael H. wisely put it, a long-term care event is a major problem and can derail a retirement plan quickly. So how do you solve this problem? Do you pay for insurance or do you self-insure? What if a standalone long-term care insurance policy is too expensive?

I'll be answering these questions and more. For all the links and resources mentioned, head over to youstaywealthy.com forward slash 116. 70% of people turning age 65 today will need some form of long-term care services in their lifetime. About 25% of those people will need care for two years or more. The average duration of care for women is about four years and the average duration for men is about two.

In summary, most of us will need some form of long-term care during our lifetime. And these statistics, you might have heard them before, these statistics are widely shared by financial advisors, sometimes in an effort to lure people into buying expensive long-term care insurance policies.

However, what often isn't shared is that only about 13% of people who are age 65 today will spend over $150,000 in lifetime out-of-pocket long-term care expenses.

And about 63% of people age 65 today will have zero out-of-pocket long-term care expenses during their lifetime. The others will fall somewhere in between. And I share all this to point out that when you pull back the curtain, a relatively small percentage of the population is truly at risk for an extreme catastrophic long-term care event. Now, that doesn't mean you should roll the dice, quite the opposite. The biggest thing that I want you to take away from this podcast series is

is that everyone, everyone needs to have a plan for long-term care in retirement. It could be self-funding, i.e. paying for long-term care expenses out of your current savings. It could be buying insurance or it could be a little bit of each. But everyone needs to have a documented plan and that plan should be comprehensive. In other words, we don't want to just look at long-term care in isolation without considering the other pieces of our financial plan. For example,

Self-funding for long-term care might be possible, but it might require you to retire a few years later, or reduce your living expenses in retirement, or maybe downsize sooner than you expected. Self-funding for long-term care could also impact your tax bill in retirement, or the amount of risk that you're forced to take with your investments.

Unlike life insurance or auto insurance, planning for long-term care isn't as simple as answering the question, should I buy insurance or not? A thoughtful analysis is needed in order to arrive at the right answer for you. And that's my goal in this two-part series, to help you make an educated and informed decision and arrive at your answer for how to attack long-term care.

So today in part one, I'm going to share what I think should be the starting point for every retirement saver. And that is to determine if self funding for long term care is possible. In other words, can your current retirement savings absorb a long term care event without the need for insurance and without jeopardizing your retirement plan?

And really quick, before we go any further, I just want to address a common misconception that having a certain net worth or portfolio size is a good metric for identifying whether or not you can self-fund for long-term care. If we just look at how much money someone has saved for retirement, well, we're ignoring their spending rate. For

For example, a person with $5 million might appear to have more than enough money, but for all we know, they could be overspending and at risk for running out of money in retirement. And on the other hand, a person with $500,000 could be living very comfortably off their pension and social security, have their expenses under control, and be in a strong financial position to absorb a long-term care event. So because there isn't an exact formula for determining if a person can self-fund or

we have to go through a process, a series of steps in order to arrive at a thoughtful answer that's unique to your situation. So let's do that. Let's break down the process step by step for figuring out if you can self-fund for long-term care. Step number one. Step one is to determine the chances and timing of needing long-term care.

I shared at the top of the show that most people will need some form of long-term care. However, that doesn't necessarily mean that the likelihood is the same for everyone. For example, women have longer life expectancies and are more likely to need care than men, and women on average need care for longer periods of time.

In addition to gender, family health history, and other factors, you will of course also want to factor in your age. If you're listening to this and you're under age 50, well, odds are in your favor that a long-term care event probably isn't around the corner. But if you're over 50 and closer to age 60 or 65, the odds start to increase.

That's not to say that if you're younger, you shouldn't plan for long-term care. Remember, I said everyone needs a plan for long-term care, but your plan just might look a little bit different. For example, after going through this exercise, you might actually decide today to be intentional about creating an investment account that's earmarked for long-term care expenses in the future so that you can self-fund in retirement, so that you don't have to go buy an expensive insurance policy.

So step number one is to determine the chances and timing of needing long-term care.

Step number two from there is to estimate the cost of a long-term care event. Now, as you might know, the cost of long-term care varies based on where you get your care, your geographic location, the level of care that you require, and more. Some of these variables are unpredictable, but to help you with this step, I'm going to be linking to a great cost of care calculator. It'll be in the show notes, which again, you can find by going to youstaywealthy.com forward slash 116.

I used this calculator and I went ahead and I plugged in California and here's what I found. The annual median cost for in-home care in 2020 was $66,000 per year.

The annual median cost for an assisted living facility was $60,000 per year. And a private nursing home room was almost $140,000 per year. Now, those are in today's dollars. But if you're 45 years old and you don't anticipate needing long-term care for, let's say, 20 years, you're going to need to factor in inflation into your calculation. And the calculator that I share in the show notes will help you do just that.

So by running these projections out to the year 2041, that would be 20 years from now, I found out that the annual median costs are close to double when inflation is factored in. So instead of $140,000 per year for that private nursing home, one might expect to pay close to $260,000 in 20 years.

And that's just one person. If both spouses need or want a private room in the year 2041, well, they're looking at an estimated $500,000 per year price tag. Now, before you panic, let's go to step number three. Step three is to customize the options available and determine what a realistic scenario might actually look like for you.

For example, you may not need or want a private nursing home. In fact, fewer and fewer people are choosing nursing homes during long-term care events. And actually, hundreds of facilities are closing each year as more people opt for in-home care, which is cheaper and, as you might figure out, is more comforting. You may also be in a geographic location that has more affordable options than what I just quoted.

Lastly, you might not consider yourself average. You might be in great health and have great family health history, leading you to assume that the odds are not very likely that you end up in that small percentage of the population that has a large six-figure long-term care event. Remember, about 63% of people age 65 today will have zero out-of-pocket long-term care expenses during their lifetime, according to that AARP study.

Once again, I'm not suggesting that you simply just hope for the best and wing it, but this step of the process is to simply evaluate the options available and then determine what a realistic scenario might be for you.

Then from there, we'll go to step number four, which is to run a retirement analysis to see if your current plan can absorb a long-term care event. You've got your estimated costs in your hands, customized to your unique situation. And from there, you can determine if your current assets are sufficient to fund your retirement goals and support your projected long-term care costs.

Now, how you run this analysis will be up to you and the resources that you have access to. At my firm, we use a sophisticated financial planning software to run simulations, but if you don't have access to one or you don't work with a financial planner, you can build models in Excel or search around online to find a retirement planning tool that fits your needs.

To keep it simple today, I would just suggest thinking of your projected long-term care costs as another expense line item in retirement, with the only difference being that it's an expense that probably won't last forever.

Through this exercise, if you find out that your current assets are sufficient to cover the cost of a long-term care event in retirement, then you can conclude that you can probably self-fund and skip buying an insurance policy. Now, I say "probably" because I would actually suggest taking this analysis a step further before you conclude that, which is step number five. Step five is to plan for a worst-case scenario.

Well, I think it's a good exercise to go through all the steps that I just mentioned and determine the amount you think you might need for a long-term care event based on your unique situation. I also think it's a good exercise to assume that you don't have a crystal ball and you might have been too conservative in your estimates and assumptions. So using that long-term care calculator that I have in the show notes for you and reviewing the statistics around historical long-term care events,

I would come up with what might be a worst case scenario for you and your spouse and then rerun that retirement analysis. Maybe you assume that you do opt for a private nursing home and assume that both spouses have a multi-year long-term care need. If you've done a great job saving for retirement and your expenses are under control, you might find out that even in an extreme unlikely situation, your retirement plan would remain intact.

And it's often what we find out when we run these projections for our clients. And it's not because our clients are billionaire yacht owners or something. It's because they've worked hard to retire debt-free, their expenses are under control, and in many cases, they have income sources like Social Security and pensions that help to take pressure off of their retirement savings and investments.

Now, if you do find out that a worst-case scenario would wipe out your retirement plan, that doesn't necessarily mean that you can't self-fund.

The first thing that I would do before you go race out and buy an expensive insurance policy is to figure out what you would need to do in that situation to get your plan back on track and recover from that event. For example, what if you downsized your home or cut expenses in other categories? Or if you're still working, what if you retired a few years later, giving you some more time to pad your retirement savings?

And then finally, I never like to suggest this, but for some people it is a reality. And that is maybe your children are in a really strong financial position and through conversations with them, they agree that they would step up and help with the costs of an extreme rare event were to happen.

At my firm, even if someone is on a great track for retirement, we always, always, always, we like to see where their plan breaks down. And then from there, we like to figure out what it takes to recover from that breakdown. It helps give our clients confidence in their retirement plan, knowing that we have a plan for worst case scenarios. That if a rare, unexpected event were to happen and the results put their retirement plan in jeopardy, well, we have a plan for getting them back on track.

Now, I just mentioned that we often find out that most of our clients can self-fund for long-term care after going through this exercise. However, that doesn't necessarily mean that they all skip buying insurance. And that's because choosing to self-fund still carries risk.

For example, maybe the cost of care increases by more than anyone could have predicted, or the timing of a long-term care event collides with another deep economic recession, or other expenses end up creeping into a client's life that we didn't plan for, like caring for a child or a grandchild.

Given that the future is unknown and it's impossible to mitigate all the risks unless you're a billionaire yacht owner, some clients do end up buying a small long-term care insurance policy to supplement their current savings and give them peace of mind. And that's what I'll be diving into next week during part two of this two-part series, which is how to evaluate long-term care insurance, the types of policies that are available, what to look out for, and of course, what pitfalls to avoid.

As a reminder, the links and resources for this episode can be found by going to youstaywealthy.com forward slash 116. Thank you as always for joining me and I will see you back here next week. This podcast is for informational and entertainment purposes only and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.