Knowing Your Financial Bad Habits

Coming from sunny southern California, there’s nothing quite as nice as an aimless, leisurely drive down the coast. As delightful as that is, it’s not a metaphor for life. Life is complicated and moves fast. It’s easy to get sidetracked. That’s why when it comes to any of your goals, especially financial independence, a clear vision of what you’re working towards and a developed idea of the best way to get there will keep you in route to your goal. Many folks have a general idea of where they want to go. They want to be fiscally responsible, perhaps investing in a home and saving for retirement while still prepared for the financially unexpected. However, 1 in 3 Americans have less than $5,000 saved for retirement and only 16 percent of those surveyed had more than 15 percent of their income saved. We know that most people have good intentions. So why do their actions take them so far away from their goals?

It all comes down to that lack of a map – not having a well-defined goal and detailed route to get there. Yes, it’s good to know that you want to be fiscally responsible, but if you don’t have a detailed definition of what that means, how do you know when you’ve achieved it? What are you saving for? How much do you need to save for retirement and how much do you need in your emergency fund? What other financial goals do you have, and which ones take priority? Lacking those details may make it easier to get distracted by impulse purchases or detoured by a financial commitment that might not be the best for your budget or your long-term financial goals.

Once you have the destination, then you need to determine the most direct route to get there. Do you have a distinct budget for all your needs and your goals? Are you going to have a monthly amount deducted from your account to your savings goals? Have you considered the influences that work against your goals and what you might do to counter them? Having a distinct plan doesn’t mean that everything is settled. Circumstances may arise that distract or reprioritize your goals. Having a definitive plan, though, can help you recalibrate your course and prevent you from being shifted away from your goals long-term.

The road to your financial independence is oftentimes anything but direct. Between relationships, families, career, health and everything in between, it’s easy to lose sight of your goals. Yet, by thinking things through and creating a detailed plan, we can stay on course. Despite every fork in the road, every decision that tempts us away from our goals, we are able to remember what we’re saving for and the right steps we put in place to get there, which makes it easier to stay on course to our financial independence.

1. https://www.cnbc.com/2018/08/27/1-in-3-americans-have-less-than-5000-dollars-saved-for-retirement.html
2. https://www.cnbc.com/2018/03/15/bankrate-65-percent-of-americans-save-little-or-nothing.html

In 2015, Americans spent $225 billion on long-term care. That’s 7 ½ times what was spent 15 years prior, in 2000. With the great advances we have made in medicine and medical technology, people are living longer. The downside to that is that it means people are more likely to need care and need it longer. In fact, over half of people turning 65 will need long-term care at some point in their lives.(1)

Types Of Long-Term Care

When you think of long-term care, skilled nursing facilities are probably what comes to mind. However, that is actually the last step in the long-term care journey. Most long-term care is not medical; it is simply assistance with basic activities of daily living like bathing, dressing, eating, and going to the bathroom.

Even without serious medical problems, most people become less and less capable of taking care of themselves as they age. Traditionally, people would turn to family for help with such things. However, in our modern era where families live far apart and adult children are already overburdened with careers and children, more and more people have to pay for long-term care services.

The most basic, and least expensive, form of care is homemaker services. Homemaker services do not involve anything medical, but rather things like meal preparation, cleaning, and running errands. The next step up, which does have a medical component, would be a home health aide.

Once basic in-home assistance is not enough, specialized facilities are needed. Care outside of the home can be in the form of adult day healthcare, assisted living facilities, and nursing homes.

Costs Of Long-Term Care(2)

Costs vary depending on the type of care needed and the part of the country in which you live. On an annual basis, the national average goes from just under $48,000 for homemaker services to over $97,000 for a private room in a nursing home, and that number is growing about 3-4% a year.

Things change drastically when you look at specific locations. In San Francisco, homemaker services are more than 150% the national average and growing twice as fast. A private room in a nursing home averages $171,185 a year. Even downgrading to a semi-private room still costs over $141,000 a year. Twenty years from now, that same semi-private room is expected to cost over a quarter of a million dollars.

As you can see, long-term care can be very expensive, especially with the rise of dementia, where people can live a long time while needing care. In 2018, the estimated lifetime cost of care for someone with dementia is $341,840,(3) and it’s probably much higher in a state like California.

Ways Of Paying For Long-Term Care

Because of the high cost, it is important to plan ahead for long-term care. There are a number of ways to pay for care, each with its advantages and disadvantages.

Medicaid

The vast majority of Americans turn to Medicaid for their long-term care expenses. However, it’s not because it’s a great option. Rather, it’s their only option. In order to qualify for Medicaid, you have to have a low income and low assets, so it’s not really something people plan for intentionally.

Self-Insure

On the opposite end of the spectrum from the people that can qualify for Medicaid are those who have amassed enough wealth to self-insure. If you have $50 million in assets, you can afford to pay $170,000 a year for a nursing home and it won’t have a significant impact on your finances.

The danger is that sometimes people take too great a risk thinking they can self-insure. Often, care is needed later in retirement when savings have already been spent down significantly. Having $500,000 in the bank may seem like a lot of money, but long-term care expenses can eat through it very quickly. Unfortunately, it’s not uncommon for a couple to spend all of their savings on the husband’s care only to leave the wife destitute at his passing.

Life Insurance With A Long-Term Care Rider

One option for those that find themselves in between broke and very wealthy is adding a long-term care rider to their life insurance. If you have, or are planning on purchasing, permanent life insurance, your policy may allow you to add a rider that would help pay for your long-term care costs. Using the long-term care option will often lower your death benefit, but many people appreciate knowing they will receive a benefit even if they never need long-term care.

Premium Paying Long-Term Care Insurance

Another option is buying pure long-term care insurance. Like with most kinds of insurance, you pay a regular premium in exchange for receiving a benefit when you need long-term care. One downside to this for many people is that you will only receive a benefit if you end up needing long-term care. As with car insurance where you have to get into an accident in order to get money out of it, if you never need care, you never see your money again.

Asset-Based Long-Term Care Insurance

The final option has been the fastest growing long-term care option over the last decade.(4) It is a combination of long-term care insurance and single premium life insurance, commonly called asset-based insurance.

The way it works is that you pay a large amount up front and then low annual premiums. You have several times your initial deposit available tax-free for long-term care needs. If you never use it or cancel your plan, you usually get your deposit back plus interest. Some plans even include tax-free death benefits.

Choosing A Long-Term Care Option

Looking at the statistics, you can tell that planning for long-term care is an important thing to do. Failing to do so can be a costly mistake. Because the multitude of options available can be complex and confusing, it’s important to work with an experienced financial professional.

An experienced advisor can explain all of your options to you, help you consider the pros and cons of each, and decide which is the best solution for your particular situation. If you want that kind of help choosing a long-term care option, call my office at (949) 221-8105 x 2128, or email me at michael.loo@lpl.com to set up a no-strings-attached meeting.

(1) https://www.morningstar.com/articles/879494/75-mustknow-statistics-about-longterm-care-2018-ed.html

(2) https://www.genworth.com/aging-and-you/finances/cost-of-care.html

(3) https://www.morningstar.com/articles/879494/75-mustknow-statistics-about-longterm-care-2018-ed.html

(4) https://www.525longtermcare.com/asset-based-ltci/