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Paying for Long-Term Care

Many people have chosen to fund their own long-term care rather than relying on insurance. Carolyn McClanahan talks to Christine Benz about this trend.

Christine Benz: Hi, I'm Christine Benz for Morningstar. Many people who have financial assets have decided to self-fund long-term care versus purchasing some sort of insurance product. Joining me to discuss this topic is Carolyn McClanahan. She's an MD and a financial advisor, and she's one of our speakers at the Morningstar Investment Conference.

Carolyn, thank you so much for being here.

Carolyn McClanahan: Well, I'm excited to be here, to be coming to the conference, it'll be good to see people again, and we're talking about important topics.

Benz: You'll definitely be talking about an important topic, which is long-term care. I wanted to ask about self-funding long-term care. I think many people I talked to who are in their 50s and 60s have concluded that this is the right route for them. How should people know whether to self-fund long-term care or purchase some sort of long-term care insurance product?

McClanahan: I think self-funding is coming more into play because long-term care insurance products have gone ballistically crazy as far as cost. And it's so hard to predict an unpredictable expense. So to me, it makes sense, especially people with the means to at least mentally set aside a bucket of money that will be used for long-term care expenses--you got to do it right, though.

Benz: Well, so let's talk about that. You sometimes hear these dollar amounts that are bandied about as the right threshold to make you a candidate for self-funding? How should people think about that?

McClanahan: To me, there are a few questions you need to ask yourself when you start planning for self-funding. First off, the most important one: Are you planning for one person or two people? If it's a couple, it makes it a lot trickier. Because if you get that first person who, say, is very healthy and gets a dementia diagnosis, you're looking at potentially average five years of care, but you can have a long tail of even longer, and that can decimate the primary spouse. So thinking through that is a lot different than if you're just a single individual, and you don't mind spending down your assets to be able to provide for your care at the end. So that's the first part.

And then the second part is thinking about where do you want to get your care. People always think about nursing homes and assisted living, but in reality, even pre-COVID, only about 5%-10% of people actually do nursing homes and assisted livings, and that number is decreasing. Now with COVID it definitely is going to decrease. The problem is, depending on the type of care you need, and how much care you need, it can be a lot more expensive to try to stay at home if you need care 24/7. So making sure that if you want to truly stay into your home until you are dragged out by your cold blue toenails, then you've got to plan a lot differently for that, as opposed to saying, okay, if it just becomes cost-prohibitive to be at home, I'm okay going into a nursing home.

And then the third part, of course, is thinking about, are you okay spending down all your assets? You have some people who have children with special needs that they need to provide for after death. And some people just want to leave a legacy because they feel like their children aren't going to have the retirement that they had. So thinking of those while you're planning is the first step.

Benz: Assuming someone wants to set aside a long-term care fund, can we talk about the logistics, where to hold those funds? Do you need a separate account? And also assuming someone has maybe different silos--taxable, tax-deferred, Roth--is there a right receptacle for that long-term care fund?

McClanahan: Yeah, emotionally, it's nice to have a separate bucket. And because what happens at the end of life, when you are in those last few years, and your children are taking care of you. When they're spending that money, they may say, oh, this is my inheritance I'm spending--it just depends on how kind your kids are. And so if you have a bucket that you say, this is my money for long-term care, you need to use it. That is the nice thing about having an insurance policy, it's better to be used for long-term care. But if you're self-funding, just identifying that, and talking about it so that the kids just hopefully it gets ingrained that this is money for long-term care.

Given that though, I don't always think it's practical to keep all these separate buckets. Because when you're developing investment policy for yourself, and especially if you're in your 60s, and you're healthy and you have another 30 years to go, you can't predict when you're going to need what money. You know, if people think, I'm not going to need long-term care until my late 80s. Well, what happens if you have a stroke at 65? You may need it sooner. So I actually like to make it part of just a generic asset allocation for all your upcoming needs. For our planning, we basically have a safety net bucket not for just long-term care. But do you need a roof? Do you, are you going to go into a continuing care retirement community where you have to put that lump-sum amount down to join that community? So just thinking in advance of all of those things that could be potential big-dollar items and making certain you have that invested fairly conservatively for when it needs to be tapped.

Benz: In terms of the tax character of those investments, does it matter? Or should it just be wherever you have those extra funds where you can set aside that specific fund?

McClanahan: Here's where I think the biggest mistake--especially individual do-it-yourselfers, because actually our niche market is individual do-it-yourselfers who became too complicated to do it themselves well anymore. The biggest mistake do-it-yourselfers make is they are not good at good tax planning. And so people are good at tax planning for this year. It's like, oh, I didn't pay zero, I didn't pay any taxes. And that's not necessarily good. You have to think long-term from a tax strategy. And so in your younger years, making certain you're at least using low tax brackets to pull money out of, and then you set that aside in either taxable account or Roth. And so to me, the most important thing is not only do you have to have good asset allocation, you have to have good tax allocation, stay tax-efficient throughout. And then when that long-term care expense comes up, you know which bucket you have to pull it from.

Benz: The last thing I want to cover with you, Carolyn, is the logistics of receiving this care. And I love that you talk about this issue that people sometimes sort of have this pat response that, oh, I want to receive care in my home. Do you think it's really important to think through the logistics of how they will receive that care? Who will be a helper in that effort? Can you talk us through some of those considerations?

McClanahan: Yeah, I mean, to me, actually this is the most important thing you can plan for. People try to like predict this unpredictable number, where the better thing is to try to control what you can control. Most of long-term care is paid by, is done by unpaid caregivers, which is I think the number is 83% of carers unpaid. And so thinking in advance, if you have children, are they going to participate in your care? One mistake I see is that people hoard their money, their children help them, and the children don't get paid for that. And they're not spending down assets for their care. And all of a sudden, they do need to go into a facility, and they have this big chunk of money. Whereas if they had care contracts--and this is totally legal--to create care contracts with your children, and pay them along the way, so that they're being taken care of as far as the time they're investing in you. And then when it comes time for you to need a nursing home, if you do, then you'll more likely qualify for services and not have to spend a big chunk of your money that you could have spent earlier on your kids.

Benz: Yeah, that's such a good point. How about for people without kids or people who don't have kids who are close by, what are the ideas for them?

McClanahan: This is a huge issue that we see. It's important throughout your life, I always say, plan for where you're going to live. Is it aging-friendly, and if your house isn't aging-friendly, you need to consider moving or making it aging-friendly. More and more communities are being built for retirement in multi-aging communities, not in just warehousing old people. So living in communities where there are a lot of younger people who will watch out for you. And then make sure you're staying involved in your community. Because when you have friends, and you're actually giving back to your community, when you get really old, they do look out for you. I've been around long enough and I see that. And then develop good relationships with your attorney, accountant, and advisors. It's so important to have multiple people looking in on you to reduce your risk of fraud and abuse. Because if you have one person just looking out for you that can open up doors to other problems. So think about that, think about what you're going to do with transportation, who you're going to get help with your medical decisions and help take care of your finances when you're no longer capable. And again, for people who don't have a family or really good friends involved, you need to start working on developing that network early.

Benz: Okay, Carolyn, great advice on an important topic. Thank you so much for being here.

McClanahan: Oh, my pleasure.