Video: Plan Carefully for Long-Term Care

Key Takeaways

• Medicare will cover a small portion of skilled care for the first 100 days, but most people’s long-term care needs are what’s called “custodial care,” which Medicare does not cover.
• If somebody is very unhealthy and doesn’t have longevity, that person most likely will need less than two years of long-term care. A super healthy person needs to plan for a longer period, because with longevity, you get an increased risk of dementia.
• If somebody needs long-term care, they’re likely not going to live in their home. That house can potentially be used as an asset for long-term care.
• Every year, look at what your cash flow needs are, what your current health is, and if there is a long-term-care need on the horizon.
• Tax planning every year helps clients maximize lower tax brackets.
• An investor’s money is earmarked for all the potential costs out there, not just long-term care. The portfolio allocation is based on how much risk a person can take psychologically and financially.

Christine Benz: Hi, I’m Christine Benz for Morningstar. Carolyn McClanahan will be joining me, along with Jean Chatzky, at the Morningstar Investment Conference in late June. We’ll be discussing retirement planning for women. Carolyn is both a financial planner and a medical doctor, so she’s well equipped to discuss the long-term-care aspect of retirement planning. Carolyn, thank you so much for being here.

Carolyn McClanahan: It’s my pleasure, Christine. Always good to be with you.

Does Medicare or Medicare Advantage Cover Long-Term Care?

Benz: It’s always great to have you. The first question is whether traditional healthcare coverage—Medicare, a supplemental policy, or Medicare Advantage—covers long-term care. I think there’s so much confusion about this issue.

McClanahan: You’re absolutely right. Everybody thinks that Medicare covers long-term care. They often confuse Medicaid with Medicare, which Medicaid does cover long-term care, but only if you’re destitute. Medicare will cover a small portion of skilled care for the first 100 days, but most people who need long-term care need what’s called “custodial care,” which Medicare does not cover. I tell people never, ever, ever get Medicare Advantage because they will make you jump through hoops and get preauthorizations for any sort of services, and they’re well known for turning down any sort of need for like rehabilitation or any skilled care once you get discharged from the hospital.

How to Determine Your Long-Term Care Needs

Benz: I assume that many of your clients are in a position where they are planning to cover long-term-care costs should they need them, need to pay them, they’re planning to cover them out of their own coffers, out of their own portfolio. Can you talk about how you help clients approach that and how you help them decide, if the plan is to self-fund long-term care, how much should they set aside?

McClanahan: The first thing that we do is actually look at what is the client’s potential long-term care need. If you have somebody who’s very unhealthy and they likely don’t have longevity, most likely that person will need less than two years of long-term care. Everybody worries about living in a nursing home for 14 years. And in reality, that is a very long tail. Very few people live in nursing homes for a long time. If you have somebody who’s super healthy, let’s say they run marathons and you know they may be 70 but look like they’re 50, then you do need to plan for a longer long-term care period because with longevity, you get an increased risk of dementia. So people with dementia tend to need care for more like an average of five years.

We establish that two- to five-year time frame, and then we talk about where you are going to get your care. Most people would love to age in place as long as it’s safe. They make the mistake of not telling their kids that it’s OK to move me to a home when it’s no longer safe for me to age in place. So, we make people have conversations with the family, and we help facilitate conversations with the family about what is the plan for the living situation as the person ages. If they’re in their current home, is that home aging-friendly? And we work toward making that home aging-friendly while they’re still fairly young. We start this sort of planning when people are in their early 60s. And if not, then where are they going to move? And will they move near a child? Is a child going to help with care? If children or families are going to step in and help with care, that can help mitigate some of the costs.

So, from all that, we come up with an idea of what the long-term-care cost is going to be. And we just have them mentally segregate that in their brain, but we don’t segregate it in the portfolio.

Why Retirees’ Homes Are the Safety Valve in Long-Term Care Planning

Benz: I’d like to talk about what role nonportfolio assets like homes play into the calculus of how much to set aside for long-term care. If someone has a lot of home equity built up, do you factor that in as maybe next-line reserves if the part of the portfolio is exhausted that you had earmarked for long-term care?

McClanahan: To me, the home is the safety valve. If somebody needs long-term care, most likely, and it’s going to be long-term, long-term care, they’re not going to live in their home. For that, we have that house as an asset that can potentially be used for long-term care.

Why Long-Term Care Planning Should Be Assessed Annually

Benz: Through a reverse mortgage, or do you assume that it will be sold? How do you think about it from that standpoint?

McClanahan: We’re not a fan of reverse mortgages just because there are so many little caveats, especially if you have both couples living, or let’s say that you have a child living with the older people to help take care of them. There can be things where people don’t understand what are the challenges with reverse mortgages on the tail end.

For us, we do planning on a year-to-year basis, and every year we look at what cash flow needs are, what their current health is, if there is a long-term care need on the horizon. And you know I’ve been doing this 21 years now, and it works beautifully because, as my clients have aged, it has become very easy to start to target when they’re running into trouble and start wrapping our heads around and wrapping the family’s heads around how are we going to cover those long-term-care costs?

We structure the portfolios so everybody has five years of cash flow anyway. Then, we always have extra cushion built in for emergencies like a long-term-care need. That gives us a couple of years to figure out, should we do something like a reverse mortgage, which we’ve never needed to do, or should we sell the home. What are we going to do to help mitigate and pay for those costs? That’s a year-by-year planning thing.

How to Maximize Tax Planning in Long-Term Care

Benz: In terms of where to hold the long-term-care fund, if I’ve earmarked a part of my portfolio that I think will go to pay those costs, should I incur them, if I have traditional tax-deferred assets, Roth assets, taxable assets, where should I think about storing that long-term-care fund?

McClanahan: Well, for us, we again don’t separate the long-term-care fund other than mentally. And every year—so people have their tax-deferred, tax-free, and taxable assets—we do tax planning every year to help clients maximize lower tax brackets. For example, I would never let a client not use the 12% tax bracket, because that’s about the lowest you’re ever going to get. Most of our clients, we’re making sure they use all of the 22% tax bracket to start pulling down their tax-deferred assets, and we either do Roth conversions with that money that they don’t need or put it in their taxable account.

We’re building that taxable account or the Roth to help pay for those future expenses, and we also do a good tax location of assets. So, in the Roth that’s where the higher growth assets are going to be, and the taxable account, we tend to use more municipal-bond funds and very tax-efficient investments that we can do—we use individual bonds, so we do bond ladders that are going to provide cash flow and mature and provide more cash flow for those potential long-term-care needs.

It’s not segregated, but when people end up needing long-term care—I’m looking up in my brain how to explain this—when people end up needing long-term care, it’s not like a one-time bomb. We have plenty of liquid assets, like we do keep money in bond funds, that could help cushion things while we prepare them and figure out how long their long-term care need is actually going to be when it happens.

How to Allocate Your Portfolio for All Retirement Expenses—Including Long-Term Care

Benz: You’ve said you don’t have a separate long-term-care bucket or anything like that, but if I’m thinking that I may have to cover long-term-care expenses out of pocket, how would I think about investing those assets? What sort of asset allocation would make sense for that portion of my portfolio that I’m earmarking for long-term care?

McClanahan: Well, again, we’re not earmarking it for long-term care. We’re earmarking all of their money for all the potential costs that are out there. In addition to long-term care, you have things like roof, dental, vision, hearing. There are a lot of things that add up that can be very expensive. We allocate their portfolio based on how much risk a person can take psychologically and financially. People in retirement, most people don’t want to be—they’re more risk-averse. They have more cash flow needs. Most of those people are going to be at least 50% fixed income, or some clients we have that have that financial flexibility to take less risk, we have people up to 80% fixed income. For them, it’s about capital preservation. It’s about having the assets ready for when the need arises.

The problem you have with long-term care is that you can have a stroke in your 60s. You may not need it till your 80s. So, keeping that bucket totally separate can really fall back. I mean, it can hurt you. Let’s say you think you don’t need long-term care for 20 years. You put it in long-term Treasuries, which I hope nobody does, but then you can be stuck. To me, you just have to plan on a when-is-it-coming-up basis and looking at your health regularly. If you know it’s going to be sooner rather than later, you just need to gradually shift more of your assets to fixed income.

Benz: Carolyn, it’s always wonderful to sit down with you and leverage your expertise in the areas of healthcare and our financial plans. Thank you so much for being here, and I’ll look forward to seeing you at the conference in June.

McClanahan: Well, I look forward to it, too. It’s going to be a good conversation.

Benz: Thanks so much, Carolyn.