In last week’s Fridays with Fisher, I shared with you my high-level viewpoint on both the physical and fiscal risk that extended healthcare events pose. One point that I tried to make is that there is a parallel between long term care insurance and disability income insurance. Simply, they both provide as a means to insulate your income from the impact of a significant healthcare event. Said another way, both long term disability and long term care insurance protect the income generating engine (our bodies when we are working and our income producing assets when we retire).
As I said before, that was then- this is now.
“Remember that time is money,” is a quote credited to Benjamin Franklin. And, if you don’t believe me, the Quote Investigator confirmed it.
Anyway, the reason for me citing this quote is to make a witty (or not so witty) statement that as I was working on booking meetings for the next few weeks. I am back in business and traveling for in-person meetings. To get on my calendar for your live and in-person meeting, please contact me directly via phone or text at (678) 512-9627.
Ordinarily, by leading off with a quote from Franklin about time and money leads to the discussion of inflation and all that. But not today, talking about time and money springs me into the concept of planning and the success ratio for a retirement funding plan. Simply how likely is someone to successful retire on a specific sum of income producing assets. With this thought in mind, I contacted an old friend from earlier in my career when I did competitive analysis for another carrier – the friend is Monte Carlo.
I asked Monte if he would give me a hand with a scenario just for the heck of it and he obliged. So here is what we set out to determine. Whether an individual who is 65 and starts retirement with a million dollars can outlast a long term care event and not run out of money before the age of 100. Here are the constants in the simulation:
An individual Age 65
Assets $1 million ($700,000 qualified money; $275,000 deferred annuity with cost basis of $100,000; $25,000 cash)
Annual Social Security Income of $36,000
Annual Medicare, Medicare Supplement, and other health premiums of $6,000
Annual out-of-pocket expenses for healthcare deductibles of $5,000
Assumed medical inflation rate of 3.0% annually (premiums and out-of-pocket expenses)
Annual retirement income from portfolio of $70,000
Annual living expenses of $106,000
Income tax rate of 20% for all years
The cost of care uses the national average for 2020 inflated at 4.0% and assumes the need begins at age 79. In 2020, cost of home care is $55,000, assisted living is $51,600, and private room in nursing home is $105,850. (Remember, they will all grow at the assumed rate of 4.0% for the duration of the simulation and reflects the national average).
Since this is a Monte Carlo simulation, there are elements that will fluctuate – inflation rate (3.0% with a standard deviation of 12), investment performance for a moderate risk profile portfolio producing an 8.0% with a standard deviation of 9.9%, and the introduction of long term care funding needs which will be explained in a moment.
You are allowed to throw water on this example as not being viable, but I will argue that it is totally reasonable given the volume of people who “play it by ear” in retirement and react to changes that impact their income rather than work with a professional and manage their income and income protection – but I digress.
Scenario 1 – no long term care need
As you would expect, the income and expanses are a wash and the likelihood of the plan coming up short is approximately 8.0%. Shortfall meaning income producing assets are not adequate to sustain the income requirements to age 100 as planned.
Scenario 2 – long term care need lasting 3 years at home at age 79 (starting in year 15)
In this scenario, there is a 27% chance that there will be a shortfall. The cost of home care will be $98,900 per year. If the portfolio performed below the median, the ability to absorb the $300,000 expense incurred significantly jeopardizes the integrity of those income producing assets meaning that the portfolio will not have enough legs to make it to the target of age 100.
Scenario 3 – long term care need lasting 5 years with 3 at home plus 2 in assisted living (starting in year 15)
This particular scenario was a surprise to me as the likelihood of a shortfall only modestly increases even though the overall liquidation of the income producing assets stepped up to half of the initial portfolio value. That shortfall increased, however, to just over 32%.
Scenario 4 – long term care need lasting 8 years with 3 at home, 2 in assisted living, and 3 in private room of nursing home (starting in year 15)
In this scenario, which is representative of the average duration of an Alzheimer’s case, the likelihood of the plan being able to surviving is about half. It’s a 50/50 chance for running out of money.
Why did I run these scenarios?
I just wanted to see how the self-funding strategy would work with very few moving parts and a million dollars for one retiree. As you can see, one person might be able to sustain a short or even moderate duration event IF the underlying performance of the assets meets their projected targets. If they come up short, there is a cash flow issue just like when expenses increase unexpectedly.
Another thing to remember is that this is for an individual. Consider the situation if it was a couple and one of the partners required care for several years reducing the income assets and the integrity of the income plan.
So, you ask, what are you telling me?
Simple – if you or your clients are uncomfortable with the impact that a short to moderate duration event. Consider introducing portfolio insurance – what is that? Simply a long term care policy like Asset Care or Annuity Care. A simple repositioning can soften the impact of an extended healthcare event – short, moderate and long term and it takes some of the risk out of the equation.
To start or expand on a conversation with your clients, invite them to join my virtual consumer seminar that runs every Tuesday at 7pm. In 22 minutes, I discuss some of the impacts that LTC can present on an income strategy. To get a feel for what it is all about and sample a few minutes of the content, go to the Virtual Consumer Seminar page on LTC Coffee Break website at ltccoffeebreak.com/virtual-consumer-seminar. Please help spread the word with your friends and colleagues about LTC Coffee Break as well as Fridays with Fisher.
Of course, you can contact me for to answer questions, address concerns, and schedule virtual or in-person meetings at firstname.lastname@example.org or via phone at (678) 512-9627.
For illustration assistance and product questions, please contact Justin Fox at (844) 658-3725 or email@example.com.