Is $1.5 million enough?

Over the past hour today, I have read several articles from investment gurus and insurance organizations that have ruffled my feathers. 

In one article from an insurance trade group, it said “if your net worth is at least $1.5 million (not including the value of your home), you can safely skip buying long term care insurance and treat long-term care expenses as you would any other bill.”

Here is what bothers me about this statement.

• There is no safely when it comes to long-term care. 
• There is no safe estimate of duration because all we know are averagesand not absolutes.
• There are no guaranteed costs because supply & demand along with the level of care, the location, and duration of time will drive the cost. 
• And, there is no consideration of what impact a drawdown of savings and investments will have on other expenses and their taxes.

Let’s look at the statement as a whole …  someone with $1.5 million can safely skip a long-term care insurance solution.  Really?  If they never need care – yes.  If they require care for a short duration of time – yes.  If they want to remain at home and they hire care in lieu of leaning into no cost care from family and friends – things get costly and blows up that premise.

If an advisor runs a Monte Carlo simulation, they will prove to themselves that average duration care impacts the income producing assets.  And, a long duration need significantly impacts them.

Don’t believe me?  Try on these numbers out in a Monte Carlo simulation.

• Couple current age – both 73 in New Hampshire
• $1.5 million in a balanced portfolio – 33% stock / 33% bonds / 33% nonqualified annuities (the stock & bonds is IRA money) – assumed annual performance is 6.0%
• $75,000 annual income last year; current year distribution will be increased by 3% inflation
• Combined Social Security income is $37,608 annually

In this scenario, the $1.5 million should remain fairly constant for the duration of their lives. UNLESS, there is a significant liquidation like a “self-funded” long-term care event.

So, play this out.  In year 6, one of them has a situation that requires care and they elect to receive care at home.  Using the OneAmerica Financial Interactive Cost of Care Map, we find that the daily national cost of care for Home Care is $215 per day but that is based upon 6 hours of service per day.  The real cost of Home Care is $645 per day (assuming they receive care for 18 hours)!  That is $4,515 per week – $18,060 per month – $216,720 per year. 

And, let’s say that the duration is around the average of 3 years which is a little more than the average for a man and a little less than the average for a woman.

How are the assets holding up now?  There is an erosion of income producing assets if they continue with their income plan of increasing by the rate of inflation.  Imagine if that was a situation where the issue was long duration like Parkinsons, Alzheimers, or simply a very long life where they require assistance.

Certainly, you can rip this apart in a billion different ways by simply changing one variable.  That’s not the point.  What I am trying to do is share with you the blind spot that many people have – they don’t think it will happen to them and when it does, they have no real plan.

Make a plan – fund a plan – review that plan – then execute the plan.

Get the OneAmerica Financial Planning Worksheet by contacting my internal Kelley Hilliard via email at kelleyhilliard.isp@oneamerica.com