“We are concerned that if we have to stay in a nursing home and our long-term care insurance runs out — after about six years — that we will spend our entire net worth paying the nursing home,” Dave says.
The couple want to be sure to leave an inheritance for their two grown children and two grandchildren.
They also want to continue traveling as long as they’re healthy enough to do so.
Dave and Jane, whose names have been changed, have saved $48,200 in a 401(k), $1.123 million in IRAs, $87,200 in a brokerage account, $31,000 in Certificates of Deposit, $34,500 in savings and $1,000 in checking.
The Star-Ledger asked Brian Kazanchy, a certified financial planner with RegentAtlantic Capital in Morristown, to help the couple make sure their money will last.
“With annual after-tax spending level of $63,000 a year, they are in terrific financial health,” Kazanchy says. “Social Security provides them with a current benefit of $38,000 a year and the balance of their living needs are easily funded from their portfolio.”
When Kazanchy projected the couple’s money future, he included a one-time purchase of a $25,000 car in two years and $10,000 of home improvements.
Projections showed a 99 percent chance they will have assets left at the end of their plan, based on a life expectancy of 92 for Dave and 94 for Jane.
In fact, they have the ability to increase their after-tax spending rate from $63,000 a year to $95,000 a year and still maintain a 92 percent chance of having assets left at the end of their lives, Kazanchy says. This assumes they continue with a 50 percent fixed income and 50 percent stock asset allocation that on average returns 5.9 percent per year.
The couple have a strong desire to leave an inheritance to their family at death, and they’re concerned that if they need a stay in a nursing home that exceeds six years, they’d expose their assets to these expenses and leaving less for their family.
“They wisely purchased long-term care insurance policies years ago that cover them for the first six years of a stay in a nursing facility,” he says. “The policy benefits rise with a compounding inflation adjustment which is helping to protect the value of the policies as nursing home care costs continue to rise.”
Kazanchy suggests they review their long-term care policies to see if there is a “shared care rider.” This type of rider would allow a spouse to use benefits that had gone unused by their partner if they exceed the maximum six years of their own benefit.
There would be a significant financial liability if Jane, Dave or both incur the experience of a nursing home stay beyond six years.
However, Kazanchy says, it’s not all that likely, according to recent studies on the topic. He said about 30 percent of individuals do not need long-term care, and of those who do, only about 8 percent need care longer than six years.
The average cost for a semi-private room in a nursing home is $305 per day in New Jersey, compared to a nationwide average of $222 per day.
“The LTC coverage is very valuable for them and their family whose inheritance is gaining protection from the coverage,” he says. “Their policies have a benefit period up to six years which is well beyond the current average stay in a nursing home of 835 days or about 2.3 years.”
Even with slim odds of having a long-term stay drain their assets, Kazanchy says, they could choose to proactively plan for this possibility by gifting assets to children and grandchildren.
By testing their financial independence analysis for a spending rate of $95,000 a year, Kazanchy says it showed they could gift about $32,000 to family with a small probability that it would inhibit their personal spending rate of $63,000 per year.
“Annual gifting rather than a large lump sum gift makes sense from an income tax planning perspective because most of the couple’s assets are in retirement plans and would need to be distributed,” he says. “I do not recommend distributing the retirement plans in large increments that would unnecessarily accelerate income taxes and push them into higher tax brackets.”
If Jane and Dave do choose to engage in family gifting, with Medicaid planning in mind, Kazanchy recommends they consult with an elder care attorney first.
Most gifts are subject to a five-year look-back, which may not be a major concern given their six years of LTC coverage, he says. Given their wealth and insurance coverage, they may not be ideal candidates to engage in Medicaid planning, Kazanchy says.
Kazanchy took a look at the couple’s investments.
They have about one year’s worth of expenses in cash, and he recommends they keep at least six months of expenses. If they want a year’s worth for peace of mind, Kazanchy says that’s fine.
Kazanchy says the couple’s roughly 50 percent fixed income and 50 percent stock portfolio “provides a nice balance of dampening volatility while still maintaining solid growth prospects.”
Because they spend modestly relative to their retirement income and portfolio assets, he says they have the flexibility to reduce or increase stock exposure. For example, reducing stock exposure would likely reduce the amount of assets they can leave to their heirs, but could decrease portfolio volatility. Increasing stock exposure could provide the possibility of a larger bequest for their family and/or any charities they wish to support.
Within their current asset allocation, he said 31 percent of their fixed income is in cash, earning very little.
“This will lead to a reduction in purchasing power as inflation is rising at about 2 percent per year,” he says. “The remaining fixed income allocation contains intermediate bonds and inflation protected bonds that are intermediate to long-term in maturities, exposing Dave and Jane to significant risk of capital loss if interest rates rise.”
The stock allocation has been performing “splendidly,” as most of their allocation is focused on the U.S. market. But, over time, international equities are likely to outperform at various intervals and they would benefit from both potentially higher returns and less volatility by globally diversifying their stock exposure, Kazanchy says.