At How Much Can I Afford to Spend in Retirement? we encourage retired households to periodically compare the present value of their retirement assets with the present value of their spending liabilities to determine their Funded Status. Unlike other approaches that frequently ignore long-term care costs or assume that these costs will be met through insurance or from other assets, our approach encourages users to estimate the present value of these future uninsured expense liabilities just like any other retirement expense.
In our post of September 9, 2024, we walked users through the process of estimating the present value of their uninsured (or self-funded) long-term care costs. In this post, we will perform these calculations for females of various ages based on the default assumptions in the Actuarial Financial Planner (AFP) and the following additional assumptions and data derived from the Genworth Cost of Care Survey 2024 Median Cost Data Tables for care in California to give users a sense of the magnitude of these present values:
Assumptions
- Two years of assisted living and one year of nursing home care (semi private room) during the three years prior to assumed retiree demise (averages from Genworth).
- Net average annual cost for the three years prior to assumed death equal to $70,000 per annum in today’s dollars. Net cost represents average long-term-care cost for the three years in today’s dollars less 25% reduction in annual household recurring expenses (about $35,000) for the final three years of life.
- Assets set aside to fund LTC expenses earn either 5% per annum and are safely invested, or earn 8% per annum and are invested in more risky assets, consistent with the default assumptions in the AFP.
- Long-term care expenses are assumed to increase by 4% per annum, 1% greater than the assumed default rate of annual inflation in the AFP.
- No long-term care insurance
The present values below represent how much a retired female should theoretically currently have set aside as a separate dedicated asset “reserve” to fund her future long-term care expenses (irrespective of the approach she may actually use to fund her retirement benefits) based on her current age and the above assumptions.
Present Values of Future Long-Term Care Costs
Current Age | PV of LTC costs @5% | PV of LTC costs @8% |
55 | $144,600 | $48,200 |
60 | 151,700 | 58,200 |
65 | 159,100 | 70,300 |
70 | 166,900 | 84,900 |
75 | 175,100 | 102,600 |
80 | 183,700 | 123,900 |
85 | 192,700 | 149,600 |
As shown in the table above, if assets set aside to fund long-term care costs are more aggressively invested and earn an annual 8% rate of return, the amount of assets needed will be less than if they are assumed to earn 5% per annum. It should be remembered, however, that more aggressive investing involves greater risk.
It should also be remembered that assumptions and pricing of long-term care can and will change from year to year, and the above present values are expected to increase from year to year and should be periodically re-calculated to see if assets set aside for this purpose continue to be sufficient. Some households may also wish to adjust the assumptions above based on their particular circumstances.
Summary
Not everyone will need long-term care. For planning purposes, it is generally prudent to assume that such care will be needed and should be anticipated to some degree in the household’s spending liabilities. If you are using the 4% Rule, or some other simple withdrawal approach, or your financial advisor is ignoring long-term care costs when determining the probability of your being able to spend $80,000 per year, you might want to look into determining a separate reserve for your uninsured long-term care costs, or simply switch to a better approach, like the Actuarial Approach, that considers all your liabilities and assets in retirement.
