In planning for retirement, most people—and their advisors—consider issues such as:
- How much savings will be needed to maintain a desired lifestyle (in other words, what’s your “number”?)
- Current assets and what rate of return will be needed to achieve the stated retirement goal
- What allocation to risky assets, such as equities, is required to achieve the needed rate of return
- What lifestyle adjustments can be made if risks appear?
While addressing these issues is important and necessary, the all-too-common unwillingness of the elderly to even discuss the possibility of losing their independence, and the awkwardness of the subject for other family members, unfortunately can lead to a lack of planning for the financial burdens that long-term care can impose.
That brings to mind the adage that the failure to plan is to plan to fail. And failing to plan simply ignores the fact that, according to the National Family Caregiver Alliance, the probability of an individual over 65 (there are 35 million Americans in this category and the figure will double over the next 25 years) becoming cognitively impaired or unable to complete at least two “activities of daily living” (which include dressing, bathing and eating) is almost 70%.
Alzheimer’s Increasingly Common
Raising the importance of the issue is that, today, one in nine people 65 or older has Alzheimer’s, while nearly one in three of those 85 or older (the fastest-growing part of the U.S. population, with 4 million people in this group currently and almost 20 million people expected to be there in 2050) has the disease (with women having twice the risk).
Alzheimer’s is a progressive, deteriorating disease for which currently there is no known cure.
What we do know with certainty is that anyone with dementia will require some form of long-term care, unless they succumb to something else before dementia reaches an advanced state.
Failure to address issues such as the cost of taking care of aging loved ones, cases when elder care is needed but not covered by insurance, and whether assets are sufficient to pay for the care required can result in a shock when long-term care becomes a reality and leads to a diminished quality of life. The burden can then fall on other family members, often with dramatic consequences for their finances as well because the cost of long-term care is frightening.
The average out-of-pocket medical expenses a 65-year-old couple can expect to incur during retirement is estimated to be in the mid-$200,000 range to somewhere in the mid-$400,000 range. And that’s the average. Some, obviously, will incur far greater expenses. Long-term care specifically is not considered an out-of-pocket medical expense because it is not “medical” in nature; rather, it is considered “custodial.”
Revealing Look At Pitfalls Of Aging
Carolyn Rosenblatt, a nurse and elder care attorney, and Dr. Mikol Davis, a geriatric psychologist, are aging experts and thought leaders on how aging affects all areas of personal finance. In their book, “Hidden Truths About Retirement & Long Term Care,” they bring to life through case studies their extensive practical experience from having advised hundreds of older people and their families on the many challenging and uncomfortable issues related to aging and the cost of care—which they show can run into the millions for those living decades with diseases such as Alzheimer’s.
Highlighting the potential costs families may have to incur, Rosenblatt and Davis note that the average current cost of caring for someone with Alzheimer’s is about $60,000 a year (and can be much higher in higher-cost-of-living areas). This does not include the cost of around-the-clock care, which is typically required in the late stages of the disease (and can last for more than a decade).
They also dispel the frequently held notion that Medicare will pay for many of the kinds of help a person with Alzheimer’s typically needs, such as meal preparation, bathing, dressing, toileting, and even getting from bed to a chair and back again. Far too many are unaware that Medicare will not pay for the kind of assistance in long-term care that doesn’t require the skill level of a licensed professional, as is the case with the aforementioned activities of daily living (ADLs). Help with ADLs is considered “custodial care” by Medicare, and, while it’s not covered, most people will need at least some help at some point.
In addition to ADLs, which also are not covered by Medicare supplemental insurance (sometimes called MediGap), there are other kinds of help many older people require, such as managing their personal finances, balancing checkbooks, bill paying, shopping, cooking, doing errands and transportation. These are sometimes referred to as “instrumental activities of daily living,” or IADLs, and they, too, are not considered medical care. Thus, it’s important that a comprehensive financial plan consider the possible (if not likely) need for these services. Highlighting the importance of planning for such expenses is that, according to the Institute on Aging, in 2005, 56% of people 80 and older reported a severe disability, and 29% reported needing assistance. In 2009, 25% of Medicare beneficiaries 65 and older reported difficulty with at least one ADL, with the figure at 85 rising to 40% for men and 53% for women.
Cost Of Help
Rosenblatt and Davis provide data on the costs of such help. For example, they note that the monthly median cost of a homemaker (someone who helps with shopping, cooking, cleaning and other household chores) is about $3,200. A worker with some training would be a personal care attendant or home health aide—costing about $20 an hour. The cost of assisted living, while varying widely across the country, is now close to $4,000 a month. (For some residents in California, assisted living facilities with daily help can cost up to $12,000 a month, and that is without any skilled nursing whatsoever; it’s just for maintaining a person who needs help with most ADLs.) If nursing home care is needed, the cost rises to about $7,000 a month for a semi-private room and about $8,000 a month for a private one. Even adult day health care costs about $1,500 a month. Does your retirement plan contemplate such costs?
Among the most important issues raised by the authors is the too-common failure to appoint an agent through a durable power of attorney document that creates advanced health-care directives (living wills). If you don’t have such documents for both medical and financial matters, you should make correcting that deficiency a high priority. In other words, estate planning isn’t just for the rich. It’s important for everyone to have a will and/or trusts, as well as durable powers of attorney.
Through the use of case studies, Rosenblatt and Davis examine the choices people have about where to receive long-term care. While “aging in place” is almost always the preferred choice, particularly for those who own a home, they also examine:
- Going to a place where nonskilled care is available part time
- Going to a place where nonskilled care or skilled care is available full time
- Going to a day center and remaining home at night
The authors also go into great detail about the risks of elder abuse, which occurs at home as well as in care facilities. This highlights the importance of using a qualified agency for home care that screens their hires. While it is more expensive than hiring someone outside an agency, it is more prudent. They also provide a checklist to follow, which includes using a trusted advisor in the hiring of care workers (do not let the person in need of care take on that task themselves), locking up all valuables, having a trusted advisor monitor financial statements, never allowing caregivers access to cash or credit cards, being conscious of the risks of telephone scams, internet thieves and “front-door fraud,” and using only fiduciary advisors.
Rosenblatt and Davis highlight the essential need for anyone who may ultimately require Medicaid to consult an estate planning attorney. They note there are legal devices, called special needs trusts, that allow a person who is running out of assets and who plans to eventually qualify for Medicaid to potentially set aside some funds to meet his or her nonmedical needs.
‘It’s Not Going to Happen to Me’
Unfortunately, one of the most common mistakes people make is that they tend to be overconfident, believing “it’s not going to happen to me.” The statistics don’t lie, though people lie to themselves. The stubborn refusal to face the facts and odds can lead to what for many are unthinkable outcomes, such as outliving your assets. This is true even for those who ignore medical warnings about obesity (about 80 million Americans are obese), smoking, insufficient exercise (nearly 80% of adults don’t get the recommended amount) and excessive drinking.
Rosenblatt and Davis relate having heard people, usually the ones with the worst health habits, say something like, “I don’t care if I don’t live long, I just want to have a good time.” The same people naively believe that if you have a lifestyle and habits that leave you prone to heart attacks, strokes, diabetes and so on, you don’t need to worry about outliving your assets because you will die early. The reality is that advances in medical science may save them. We are much better at saving lives than at paying for the costs of living a long time.
While Rosenblatt and Davis wrote the book specifically directed at financial advisors, “Hidden Truths About Retirement & Long Term Care” should be mandatory reading for all adults, as it has important information that can help everyone be better prepared for the costs they or their family members might face in retirement. I highly recommend the book, which makes a great companion to the authors’ other book, “Succeed with Senior Clients: A Financial Advisor’s Guide to Best Practices.”
Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.