How Should I Incorporate Long-term Care Costs Into My Portfolio Planning?

As originally published in Worth

The good news is American men and women are living longer lives today than at any point in history, with average life expectancies of 76 for men and 81 for women. For a 65-year-old couple, there is a 63 percent chance that at least one member will live to 90 or beyond, according to the Society of Actuaries. But how does an increase in life expectancy affect how we plan for the possibility of needing to fund long-term care in our later years?

Long-term care insurance is the obvious answer for the majority of the population, but for high-net worth clients the conventional advice is to self-fund this cost. In some ways, that seems a bit frightening – what will this cost and how will this expense impact a portfolio? While it can’t be predicted with certainty, a quick study of readily available statistics on lifespans, costs and average length of long-term care requirements provides good estimates for planning.

Long-term care, be it living in an assisted living facility, having a private or semi-private room in a nursing home or hiring private help at home can range anywhere from $40,000 to $200,000 or more per year depending on the degree of assistance required, the particular facility or qualifications of home help and geographic location, among other factors . Costs have increased an average 5 percent per year, a pace which puts them on track to double in roughly 15 years.

If you make conservative assumptions and plan for four years of care at $150,000 per year, it becomes a question of deciding if your portfolio can withstand a 70% probability of subtracting $600,000 to pay for long-term care. For someone with at least $5 million or $10 million in assets, it should theoretically be very feasible to absorb that cost. Nonetheless, the relatively high likelihood that long-term care will be needed makes planning ahead for that possibility essential. The U.S. Department of Health and Human Services estimates that 70 percent of people over age 65 will require some type of long-term care services in their lifetime, with the average length of care being three years (slightly longer for women).

The wild-card factor is the chance of Alzheimer’s Disease or a debilitating stroke which, in a worst-case scenario, might entail a decade or more of full-time care and a cost of well over $1 million. One in eight Americans age 65 and older have Alzheimer’s, according to the American Alzheimer’s Association. By age 85, the figure is close to one in two. That sobering possibility alone may be reason enough for even those who can afford to self-insure to deposit a substantial amount per year into a secure, liquid account designated for this purpose.

Even those who could most easily bear such costs still sometimes look to long-term care insurance as a way to protect bequest amounts for heirs. Policies offering lifetime benefits have virtually vanished, and premiums have risen rapidly. But new products such as shared-care policies for couples may make the annual outlay more palatable.

Ultimately, planning for long-term care — be it through the purchase of insurance products or self-funding — provides peace of mind.

The material shown is for informational purposes only and should not be construed as accounting, legal, or tax advice.  Altair Advisers LLC is a registered investment adviser with the Securities and Exchange Commission; registration does not imply a certain level of skill or training.  While efforts are made to ensure information contained herein is accurate, Altair Advisers cannot guarantee the accuracy of all such information presented.