It makes sense that emergency medical expenses are a leading cause of credit card debt, bankruptcy, and retirement failure. Major medical expenses are normally unexpected. Because they are not regularly occurring, many fail to budget for them. However, you can budget for your own health care costs.
Each of us must make the decision either to self-insure or get long-term care insurance. Periodically, insurance salespeople have set up billboards suggesting that if your financial advisor does not recommend long-term care insurance you should sue them. However, we are not fans of long-term care insurance. If you can self-insure, you will likely be better off.
I said as much in the 2004 article “Long-Term Care Insurance Is Too Risky And Too Expensive.” Since then, this article has been quoted by many different financial advisors in defense of self-insuring.
We think the long-term care insurance policies are overly expensive and unnecessarily restrictive. Policies are sold based on purposefully misleading statistics and last as little as 3.1 years despite being called “long-term.”
Long-term care insurance (sometimes abbreviated LTC or LTCI) salespeople will tell you the percentage of people who will need long-term care. They notably do not tell you how much care those people end up needing. It turns out that the average end-of-life health care expense is $35,000 and is needed for 6 months when you are 85 years old.
That is simply the average. Requiring nursing home care is one of the more expensive end-of-life medical events. The median annual cost of nursing home care in the U.S. is $75,000.
Statistically speaking, 60% of people never need nursing care. Of the remaining 40%, 18% stay less than 1 year, 12% stay 1-3 years, and 10% stay more than 3 years.
Most retirement software runs hundreds of possible retirement scenarios, called a Monte Carlo analysis. Success is defined as achieving 80% or more of investment outcomes where blindly following your planned strategy means staying solvent until you die. Keeping an 80% success rate ensures that your average result is much higher than depleting your portfolio. You are prepared to deplete the portfolio, but over half the time you will leave a significant legacy.
With 90% of people requiring 3 or less years of nursing home care, budgeting like you need three years of nursing home care should help ensure that you have sufficient money to self-insure your long-term care.
At an average annual cost of $75,000, three years of care would cost $225,000. Many needs are much smaller than nursing-home care. Additionally, $75,000 is a nursing-home care national average, not necessarily the best accommodations or prolonged lengths of stay.
Even married couples can likely budget this amount for just one person. Often, the first person can be taken care of by the second person with some professional help. Then, the surviving spouse is more likely to require institutional care. If you have different desires though, you can adjust your budgeting targets accordingly.
For those who do need nursing home care, they need it on average at age 85. This means that the average person should strive to have saved at least $225,000 more than their necessary retirement savings by age 85 to self-insure their long-term care.
Assuming a 3% return over inflation, the earlier that you save these funds, the less you need to save. Setting aside $44,273 at age 30, if it grows at 3% over inflation, should grow to $225,000 at age 85.
You do not literally need to set the money aside. It can live as part of your HSA, IRA, 401(k) plan, and brokerage investments. However, when you are calculating your safe spending amount or are calculating if you are on track for retirement with your savings, you should exclude this amount of money from your calculations.
You can see the savings targets for various ages in this table:
|Have saved more than…||by age…|
If you save this target, your assets have a better chance of seeing you all the way to the end. Saving this amount of money to self-insure for long-term care insurance should cover 90% of long-term care cases.
For those who have been contributing the maximum to your HSA, you can count those HSA funds towards your long-term care needs savings target. For those without an HSA, you can save elsewhere in other accounts.
Retiring with just enough assets for your expenses ignores the important and unexpected expense of health care needs. But saving for them, if done early enough, is not too expensive and helps to protect yourself from this potential financial shock.
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