Self-Insuring Your Long-Term Care? What is the Present Value of Your Future Long-Term Care Expenses?

At How Much Can I Afford to Spend in Retirement?
we encourage retired households to periodically compare the present
value of their retirement assets with the present value of their
spending liabilities to determine their Funded Status. Unlike other
approaches that frequently ignore long-term care costs or assume that
these costs will be met through insurance or from other assets, our
approach encourages users to estimate the present value of these future
uninsured expense liabilities just like any other retirement expense. 

In our post of September 9, 2024,
we walked users through the process of estimating the present value of
their uninsured (or self-funded) long-term care costs. In this post, we
will perform these calculations for females of various ages based on the
default assumptions in the Actuarial Financial Planner (AFP) and the
following additional assumptions and data derived from the Genworth Cost of Care Survey 2024 Median Cost Data Tables for care in California to give users a sense of the magnitude of these present values:

Assumptions

• Two
  years of assisted living and one year of nursing home care (semi
  private room) during the three years prior to assumed retiree demise
  (averages from Genworth).
• Net average annual cost for the three
  years prior to assumed death equal to $70,000 per annum in today’s
  dollars. Net cost represents average long-term-care cost for the three
  years in today’s dollars less 25% reduction in annual household
  recurring expenses (about $35,000) for the final three years of life.
• Assets
  set aside to fund LTC expenses earn either 5% per annum and are safely
  invested, or earn 8% per annum and are invested in more risky assets,
  consistent with the default assumptions in the AFP.
• Long-term
  care expenses are assumed to increase by 4% per annum, 1% greater than
  the assumed default rate of annual inflation in the AFP.
• No long-term care insurance

The
present values below represent how much a retired female should
theoretically currently have set aside as a separate dedicated asset
“reserve” to fund her future long-term care expenses (irrespective of
the approach she may actually use to fund her retirement benefits) based
on her current age and the above assumptions.

Present Values of Future Long-Term Care Costs

As
shown in the table above, if assets set aside to fund long-term care
costs are more aggressively invested and earn an annual 8% rate of
return, the amount of assets needed will be less than if they are
assumed to earn 5% per annum. It should be remembered, however, that
more aggressive investing involves greater risk.

It should also be
remembered that assumptions and pricing of long-term care can and will
change from year to year, and the above present values are expected to
increase from year to year and should be periodically re-calculated to
see if assets set aside for this purpose continue to be sufficient. Some
households may also wish to adjust the assumptions above based on their
particular circumstances.

Summary

Not
everyone will need long-term care. For planning purposes, it is
generally prudent to assume that such care will be needed and should be
anticipated to some degree in the household’s spending liabilities. If
you are using the 4% Rule, or some other simple withdrawal approach, or
your financial advisor is ignoring long-term care costs when determining
the probability of your being able to spend $80,000 per year, you might
want to look into determining a separate reserve for your uninsured
long-term care costs, or simply switch to a better approach, like the
Actuarial Approach, that considers all your liabilities and assets in
retirement.