Swedroe: Financial Perils Of Old Age

April 25, 2018

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.


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