A question that often gets put to the early retirement crowd is how they plan to pay for end of life care.
This is based on the assumption that early retirees who live tight budget lifestyles are not properly accounting for very expensive health care costs near the end of their lives.
It raises the question of insurance vs. self-pay. If you purchase long-term care insurance to hedge end of life costs, are you accounting for expensive premiums in your budget? If you self-pay, how much should you count on having set aside for care?
These are important questions! But I'm afraid the truth is often skimmed over by insurance companies eager to sell a lucrative product using fear tactics. Smart early retirees have nothing to worry about!
Let's first examine my basic early retirement rules.
- If you retire younger than 50 years old, have 30x your annual spending in investments
- If you retire between 50 and 60, have 25x your annual spending in investments
- If you retire in your 60s, have 20x your annual spending in investments
- Adjust spending for CPP using a conservative estimate, don't count on OAS if you can't claim it yet
- Invest in a stock heavy portfolio (at least 60% in growth ETFs) with a cash cushion
- Keep investing fees low and use index funds where you can
End of Life Facts
In Canada there are numerous programs out there that prevent – or at least limit – seniors from living in abject poverty. We've got universal health care, pharmacy coverage for low income individuals, long-term care assistance, and many other programs. These programs do vary by province, but most are similar in nature.
The biggest, and most worrisome expense, is long-term care costs. This is basically full assistance living in a facility. While provinces will provide care facilities based on income (B.C. for example charges you 80% of your after-tax income and they pay the rest), a comfortable existence in a private facility will cost you $50,000 to $75,000 per year!
How do you account for this potentially massive expenditure?
Well, first it's important to look at the stats. One-third of Canadians over the age of 85 live in continuing care facilities. Most are in provincial funded and not-for-profit facilities. The average length of stay is less than two years with very few residents staying longer than 5 years. Most residents are single females.
An increasing number of elderly Canadians are choosing home care services rather than care facilities as it permits greater freedom and is significantly cheaper. Approximately 1 in 5 residents currently admitted to long-term care facilities in Canada could be treated through less expensive home care instead.
Home care costs are typically charged on an hourly basis. Depending on your area and the level of care required, the fees range from $20 - $90 per hour with full nurse care being the most expensive. Typical home care costs range from $15,000 and $30,000 per year. At a certain point, it is more economical to live in a facility for a fixed cost than hiring for elaborate care at home.
Life Expectation and Cost
Given that 1 in 3 people over 85 enter a care facility, I think it's wise to assume several years of care costs in your retirement plans. I'll use 90 as the age to enter a facility to be on the safe side. This means a retiree should have an ending portfolio value sufficient to cover at least $150,000 in care costs at 90 years old. That's enough for 2 - 3 years of full care at a moderate to high-end facility, or 5 - 10 years of home care.
Remember, most facilities are much cheaper, home care is a very valid option, and government assistance will likely cap your financial exposure. Also, the average life expectancy in Canada is currently 82 years so your chances of entering long term care for any significant period of time is actually quite small.
Also, if you need long-term care, chances are you won't be spending much money on anything else. Vacations, vehicles, entertainment, home maintenance, and other larger expenses are no longer serious factors. End of life existence tends to be pretty bleak; after all, that's the whole point of early retirement!
Insuring Against Your Risk
Long-term care insurance is expensive. An inflation-protected policy that would pay up to $3,000 a month for full-care benefits could easily cost $300 per month in premiums. Premiums are also subject to increase after an initial fixed period.
Let's not forget all the caveats embedded into each policy, payout limitations, and the likelihood of your kids or friends having to run you around to doctors and fighting with the insurance company to even start paying benefits. If you have a long list of pre-existing conditions, you can't even get insurance.
I am personally of the opinion that self-insurance is best for many reasons. Insurance companies are profit-driven enterprises (rightfully so); they don't work for free. The most likely people to obtain this type of voluntary insurance are those which are almost certainly destined to end up in care facilities. This drives up the premiums for healthier individuals.
The best insurance policy is exercise, a healthy diet, and mental stimulation! You are significantly more likely to end up in a facility if you are overweight and have mobility problems, you suffer from dementia, you have heart conditions, you are a diabetic, and so on.
Monte Carlo Simulations
Monte Carlo simulations are like stress tests for your portfolio. Using historical figures and setting portfolio and spending parameters, we can analyze your probability of a successful retirement. It's essentially a statistical tool to measure outcomes and it's very useful for early retirees.
Retire at 40 with 30x, Annual Spend $50,000
This simulation has a 99% chance of success of a 50 year retirement to age 90. The median ending portfolio value is $4.6 million (inflation-adjusted). The only year that failed since 1870 is a retirement starting in 1906!
Regardless, considering a median portfolio value of $4.6 million at age 90 with every year other than 1906 ending well over the required $150,000, it's pretty safe to say that a couple retiring at 40 years old with 30x annual spending is very safe to cover long term care costs and they don't need insurance.
Retire at 50 with 25x, Annual Spend $50,000
This simulation also has a 99% chance of success for a 40 year retirement ending at age 90. The median inflation-adjusted portfolio value at 90 is $2.3 million with a retirement starting in 1906 again being the only failing year in the last century and a half.
Every other year ended with with an inflation adjusted portfolio well over the required end of life costs. Again, it's safe to say a couple retiring at 50 years old with 25x expenses is safe to cover their own potential long-term care costs in the best facilities without insurance.
Retire at 60 with 20x, Annual Spend $50,000
This simulation has a 95% chance of success for a 30 year retirement ending at age 90. This time, several starting years failed: 1902, 1906, 1907, 1965, and 1966. While the median inflation-adjusted portfolio value at age 90 was $1.2 million, there are a number of years which resulted in a portfolio value below $150,000 at 90 years old.
This looks scary, but I should explain I didn't count OAS payments ($6,000+ per person annually). With this simple adjustment, the success rate would actually be 100%. Every simulation would have resulted in an ending portfolio value well over $150,000.
Retire at 60 with 20x, Annual Spend $30,000
This scenario has a 100% chance of success with a median inflation-adjusted portfolio value of $1 million at age 90. There are several years where the portfolio valued ended below $150,000.
This might imply failure and a sprint to your local insurance company, but that's really not necessary. Low spending is actually safer because government benefits offset a larger percentage of your retirement spending and portfolio withdrawals.
Again, I didn't count OAS or GIS payments and only a conservative CPP benefit in my calculations.
If you have adequately saved before retirement using 30x, 25x, or 20x as appropriate, you will have a very comfortable end of life situation and realistically you won't need LTC insurance.
These figures in the simulations don't include the value of your unproductive assets (your house). Proceeds from the sale of a paid-off home will more than cover long-term care costs in a facility.
The odds of success are so heavily in your favour that the only thing that could blow up your plan is a very poor investment plan, cancellation or severe reduction in seniors benefits (CPP, OAS/GIS), or a massive increase in the cost of long term care. Of these, the most likely scenario is bad investing, so focus on that first.
In the worst situation you can go into a government facility and your costs will be limited to your income level. These facilities might be less pleasant, but on the cynical bright side you're likely to have dementia if you are in a long-term care facility so you won't remember anyways.
I honestly don't know who would buy long-term care insurance rather than self-insure. Perhaps if you've saved no personal money, are renting and living from an inflexible but moderately lucrative DB pension, are funding your retirement using your home equity, are generally unhealthy, demand a high-end facility, and are prioritizing leaving an inheritance over your personal care, LTC insurance could be considered. Thankfully the Moose world is much more practical than that.
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