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The Costs of Living Longer
By David Chazin - In conjunction with Lincoln Financial Advisors Corp., a registered investment advisor
In general, Americans are living longer, today, than they ever have in history (and I see no reason why the Chevron populace would differ). While that’s good news on the whole, it’s a well known fact that older people generally have increased healthcare costs. Policymakers and pundits have spent much time talking about basic healthcare costs and what to do about them. Unfortunately, by comparison, long-term healthcare costs have received little attention.
The U.S. Department of Health and Human Services estimates that at least 70% of people over the age of 65 will require long-term care (LTC) in the future, including services like home visits by healthcare professionals, stays in a nursing home and 24-hour medical support. That means there is a better than two-thirds chance that you will spend part of your post-Chevron years in need of a large measure of custodial medical care.
So how much might that cost?
It makes sense to plan ahead for the possibility. LTC is expensive—the national average annual cost of a private room in a nursing home is $79,9351 ($219 per day). It’s even worse in California; according to the California Association of Health Facilities,2 in 2012, the average annual cost for a skilled nursing facility is $82,500.
As if that wasn’t bad enough, you have to consider that most long-term care costs aren’t incurred until you’re long retired from Chevron, when you’re least prepared for it. Assuming you’re 50 today and you need long-term care around the typical age of 80, the cost could easily be in excess of $370,000 per year, per person (this is assuming just 5% annual growth, which is below current averages for health care costs). Since the average length of care is 2 – 3 years, the total financial burden could be more than $2,300,000 if both you and your spouse require this level of care.
If $2.3 million sounds like a lot of money, that’s because it is. You might be saving quite a bit in your ESIP today and watching your CRP grow until your retirement date, but incurring costs like this won’t take long to eat away savings and/or the kids’ inheritance.
But what about Medicare?
Great question. Unfortunately, you can only qualify for Medicare at age 65, and even then you can’t count on Medicare to foot the bill. It pays for a maximum of 100 days of skilled nursing care (and pays the full cost for only the first 20 days), after 3 days of qualifying care in a hospital. It also doesn’t pay for custodial care, such as help bathing and dressing. Medicaid does pay for custodial long-term care, but only after you’ve exhausted most of your assets—which carries a whole different set of consequences—and it may not fund the quality of care you’d like.
What if I set aside money?
If you have substantial assets (i.e. many millions of dollars), you may decide to set aside money specifically to pay for potential long-term care. Besides the fact that long-term care can be very expensive (see above), there are two major concerns with this strategy.
The first concern is that you never know when you might need long-term care. The last thing you want to do is suddenly have to pay for long-term care only to discover that you’ve lost a significant amount of the money that you set aside and invested for this purpose. As a result, you may have to invest conservatively, which means you’ll likely earn lower returns over the long-term, making it more difficult for you to foot the LTC bill.
The second concern is that you generally do not want to use money from tax-deferred retirement accounts (such as your ESIP, or an IRA) to pay for long-term care, because drawing money from these accounts will drastically increase your tax liability, since all withdrawals are considered taxable income for that year.
So what other options are there?
One popular tool at the core of addressing any long-term care concerns is a long-term care insurance policy. These policies generally pay for at least a portion of nursing home or at-home nursing care, as well as custodial care, should you need it. Chevron may offer access to long-term care policies that you can purchase while working there, or you can look outside at an individual policy.
When should I look at this?
Many Chevron employees first consider buying coverage as they are approaching retirement, but doing so earlier in life has advantages. If you purchase early, you are more likely to qualify for preferred rates (meaning that your premiums will be lower) and if you wait too long, you risk being denied coverage.
On the flip side, if you purchase a policy too early in life, you’ll likely pay many years of insurance premiums. As is my answer to many questions, the “perfect” time to buy depends on your individual circumstances. Some things I look at are your family’s health history and where you might retire, as the Bay Area is a very high-cost region for long-term care.
Are there other options?
You don’t have to look at long-term care insurance as the only solution to protecting your nest egg. If you have a life insurance policy with accumulated cash value (such as a whole life or universal life policy), you may be able to use it to help pay for long-term care. Borrowing against the policy or doing a life settlement are two ways that you can do this, although those are advanced strategies and you should talk to a financial professional before attempting.
There are also new types of hybrid life insurance / long-term care insurance products that provide greater flexibility in long-range financial planning, but again, these are similarly advanced strategies.
So what should I do?
There are a few different ways you can look at addressing the potential costs of long-term care, and there are certain times to act that are better than others. You want to protect your loved ones financially and emotionally, so I suggest talking with a financial planner who will make recommendations in your best interests about long-term care protection, whether that be with an insurance product or via other means.
I’d be happy to personally sit down with you to discuss the ways you can start saving now to protect against the potential costs of living longer. Because I work with Chevron executives, managers, employees and retirees, I'm knowledgeable about your various compensation plans and benefit offerings, plus other issues specific to Chevron employees (in addition to the retirement, investment, and estate planning issues everybody faces). In fact, chances are you may know one of my Chevron clients and you can ask them how working with a financial planner has helped them.
Please contact me at (925) 659-0251 with specific questions or to schedule a time to meet in either my San Ramon or Point Richmond office. Or for more information, please visit our website at www.insight2wealth.com.
1Market Survey of Long-Term Care Costs, MetLIfe Mature Market Institute, 2009.
2Guide to Long-Term Care. http://www.cahf.org/AboutCAHF/ConsumerHelp/GuideToLongTermCare.aspx (September 2012)
The content of this material was provided to you by Lincoln Financial Advisors Corp. for its representatives and their clients.