With the costs of LTC services increasing at 5% to 6% annually over the past 20 years, it would be likely to expect that trend to continue. However, with the shortage of workers for LTC facilities, it is also likely that wages, and thus prices will rise even faster. How would I calculate how much to set aside now?
It is often difficult to visualize how something we purchase may cost considerably more in the distant future. Who envisioned $5.00 for a cup of coffee, or $4.00 for a gallon of gasoline? Many baby boomers have purchased cars recently that cost more than their first house.
If we have some idea of the rate of inflation for a particular product or service, and we can assume how many years into the future we might need that product or service, a calculator can be built to compute this for us. www.RetirementChoices.net/rraabeLTC1.html is such a calculator for LTC. It was created by Louis Lavosh of www.financialScenarios.net (866) 808-8342 and is used by financial planners and LTC insurance specialists across the country.
There are five variables, and you can move any or all of them. First, consider the cost of care in today’s dollars. If you want to prepare for the cost of a nursing home, I’d suggest between $250 and $300 a day unless you are in the more expensive New England area. An assisted living facility might cost half of that. Secondly take a guess at how many years it might be before you need care.
Third is how many years of care you might need. The national average of nursing home care is about 2.8 years. However, only a relatively small percentage of LTC is done in nursing homes. The average for CBRFs or other assisted living type facilities is 4 years and there are no good averages of how long one may need home care.
The last two are easy, the cost of LTC services have been increasing at a rate of 5% to 6% a year for the past 20 years. However, a recent Wall Street Journal article addressed the problem facilities are having finding employees. Typically when an industry has a hard time finding employees, wages rise until sufficient applicants appear. Thus costs may increase faster in the future. Lastly, what are you earning on your investable assets?
Using myself at age 63 as an example, I’ll enter $270/day as the cost of care in a nursing home. I may need care at age 85 which is 22 years from now. Hopefully, I will only need three years of care. I’ll estimate that costs will increase at an average of 6% and I’m earning 4% growth on my money. The calculator tells me I should set aside $426,385 today, which will grow to $1,051,981 in 22 years, which will then pay for three years of nursing home care.
I am so happy that I decided to purchase LTC insurance back when I was 52. It has 5% compound inflation on the daily benefit which is now $244 a day. I pay $1800 a year for this policy which has a 90 day deductible and lifetime benefits. Nothing works like traditional LTC insurance with its 5% compound inflation feature. Expensive? I think not, it is actually dirt cheap!
Romeo Raabe LUTCF, LTCP is known as TheLongTermCareGuy.com and is located in Green Bay, WI. He works all over the state primarily by referral from other insurance agents, financial planners, attorneys and accountants who use him as the expert helping their clients deal with LTC issues. He can be reached at (800) 219-9203