I read an article in the Journal of Accountancy recently that made me scratch my head and ponder the possibilities. In the article called “The long term care quandary: helping clients prepare”, a statement was made that I am not fully convinced is a solid “rule of thumb” (their words not mine).
“There’s a long-standing rule of thumb that says purchasing LTC insurance coverage makes the most sense when net worth falls between $200,000 and $2 million … having assets of $2 million or more is typically more than enough to pay for any type of LTC, allowing clients to forgo the cost of premiums and account for the possibility of not needing any care.” Here is the full article.
In their defense, the article is a bit dated but this was the first article that appeared in my Google search. Suffice it to say, I think that the suggestion that possessing $2 million in assets as a minimum threshold for self-funding is a flawed position.
Here’s why … everyone’s situation is unique.
Taking it one step further, my $2 million may be more illiquid than yours. Or, yours may be more tax efficient than mine. Or, any other situation. This is why I hate rules of thumb – they take the personal out of planning.
Seriously, how are those assets deployed? Is the client property rich and cash poor? Are their assets predominantly in qualified money? What are their plans for income? What is their plan for a legacy?
Just for kicks, let’s employ another rule of thumb – the 4% withdrawal rule. According to that “rule of thumb”, the assets should last about 30 years (check out the example on the link that I shared for more details). That, however, is a rather rigid structure and only accounts for inflation to be a factor on the income-producing assets. So, that $2 million would generate a pre-tax income of $80,000.
What happens to the plan when their health is not compromised? The plan executes pretty well.
What happens to the plan when their health is compromised for a couple of years? The plan stumbles. How much it stumbles is dependent upon what kind of costs are incurred.
Since we are playing averages – let’s say that one of the client’s health is compromised to the extent that they require supervision or assistance from a trained caregiver because their spouse in not physically able to provide the care. (She is 5’1” 115 lbs.; he is 6’2” and 235 lbs.) And, they bring in care for 8 hours a day – in Connecticut, that would cost $286 a day for informal care or $202 a day for formal care at home (in today’s dollars) reducing the income producing assets. But there is more!!!!!
What asset are they going to liquidate? And, what is the additional cost for that liquidation?
If it comes from qualified money, they would have to account for the additional taxes. If it comes from semi-liquid money, they would have to account for some taxes. If it comes from cash, then it would likely last a short duration of time before they had to dip into resources that are taxable.
And, it keeps getting better, that money may impact their Medicare premiums. IRMAA will introduce a premium surcharge. For an individual, the income threshold in 2025 is $106,000; for a couple, it is $212,000. And, remember, it is a lagging charge which increases with income.
Back to our situation, not only will the client withdraw money and reduce the asset base, their living expenses will increase , their taxes will increase, and they will be offering physical support for their spouse when the hired caregiver is not there.
If the client’s assets are worth $2 million, then why not deploy a small portion into a defensive posture to avoid increasing their taxable income and avoiding unnecessary surcharges. On top of that, isolating a pool of assets and positioning them for a tax-efficient liquidation makes sense.
I know that people will push back and say that I am pontificating on this situation, but I didn’t make up the $2 million rule of thumb for “self-funding” or the 4% income rule of thumb. I just crammed them together.
What am I saying … every person needs a customized plan AND self-funding is not efficient.
Contact my internal sales partner Kelley Hilliard at (844) 623-4251 or via email at kelleyhilliard.isp@oneamerica.com for more information or to secure your copy of the Step by Step Guide to Long Term Care along with the Care Planning Worksheet.
Fridays with Fisher 