End of Life Costs for Early Retirees in Canada

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.

  1. If you retire younger than 50 years old, have 30x your annual spending in investments
  2. If you retire between 50 and 60, have 25x your annual spending in investments
  3. If you retire in your 60s, have 20x your annual spending in investments
  4. Adjust spending for CPP using a conservative estimate, don't count on OAS if you can't claim it yet
  5. Invest in a stock heavy portfolio (at least 60% in growth ETFs) with a cash cushion
  6. 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 registered nursing 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

Source: cFIREsim, TheRichMoose.com

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

Source: cFIREsim, TheRichMoose.com

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

Source: cFIREsim, TheRichMoose.com

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

Source: cFIREsim, TheRichMoose.com

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.

The Take-away

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 government 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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We’re Done With Saving for 2017

Yes there are still a few more months left of 2017, but we're done with saving more money until 2018. And we exceeded our savings goal this year!

Every year we save using a strategy where we front-load our tax-advantaged accounts and contribute the remainder monthly to our Cash/Margin account. Front-loading means that we stuff our tax-advantaged accounts full to the limit at the beginning of each year to maximize their potential.

Front-Loading Accounts

Here's how this works. At the end of each year, the government tells us how much the contribution limit of our TFSAs is going to increase for the next tax year. In 2016 & 2017, the limit was increased by $5,500 each year per Canadian who was over 18 years old.

For 2018 the TFSA contribution will be increased by $5,500 or $6,000 per person. Increases are linked to inflation and rounded to the nearest $500. My wife and I share our finances, so that's $11,000 (hopefully more!) of new room in January.

By front loading TFSAs instead of spreading the contributions out over a year, we can maximize the returns of tax advantaged accounts. It's a matter of time-money advantage.

Starting with a $5,500 contribution and front-loading each year, at 6% real return your TFSA will be worth $76,844 at the end of 10 years.

If you instead contribute $458 at the end of each month, using a 6% return your TFSA will be worth $74,412 at the end of 10 years. That's a $2,400 difference in just 10 years that cost you nothing extra.

Compounded over 40 years, the difference is even bigger! If you have two TFSA accounts (couple with joint finances), you can enjoy tens of thousands in extra tax-free value by front-loading.

Little tricks like this over time can make you significantly better off. While your total money saved doesn't change, your after-tax net worth does.

Our Savings Stats for 2017

This year we stuffed $63,500 into our various investment accounts! None of this is borrowed money and it doesn't include our contributions to our envied government pensions. It's simply saving from what's left of our paycheques after all the deductions.

Putting that into perspective, my personal net earnings after taxes, benefit payments, and pension contributions are approximately $50,000 so far this year. My wife, with net earnings so far this year of $35,000, earns less than I do.

But... Wait a minute here! Are you trying to tell me that you earned $85,000 as a couple, saved $63,500, and somehow lived off the last crumbs of $2,350 per month? That's impossible!

Well you're right we don't spend just $2,350 a month, but don't forget that we front-loaded in the beginning of 2017. Including our tax refund, we started the year with a front-load of nearly $15,000. That means from February through now, we actually saved around $48,000 from our earnings flow.

Over the course of a full year, we average a savings rate of around $5,000 a month. Together we earn a combined net income of $9,000 a month and spend approximately $4,000 a month.

Our goal is to save $60,000 a year as a couple, so we beat our goal by $3,500. This extra was mostly due to selling our gas-guzzling truck earlier this month and going down to one vehicle.

Spending Less Without Suffering

We keep a tight lid on our spending and this gets easier and easier for us as we become smarter and make better choices.

We moved this year and negotiated a good rent deal that costs us far less than owning ever did or would in our area. We live in a beautiful, newer house with 2 large suite bedrooms and a gorgeous kitchen, leather furniture, and a lot of other nice things. Our style is quite "Scandinavian" so we don't have every surface, drawer, and cabinet stuffed full of crap we don't need or use; utility drives our purchase decisions.

We are now down to one vehicle, saving thousands each year on insurance, gas, maintenance, and vehicle repairs. We own a nice (used) car that takes us everywhere surrounded in leather comfort, heat in the winter and A/C in the summer. So far it's been reliable and served us well. I bought a high performance bicycle a few months back and have been clocking miles on that going where I need to go while getting exercise!

We cook our meals from scratch using fresh, wholesome ingredients. We make our own wine (which tastes amazing!). We avoid snacking. We entertain friends and family regularly. Our grocery budget might be lean, but trust me, there's no KD and hot dogs over here.

We prefer to spend our time with friends and people we care about, so this means a lot of home entertainment. But we do like going out. So far this year we've been to numerous live shows, theatre performances, and comedy events. We just avoid events with ridiculous high ticket prices.

We went on vacation together twice this year for several weeks each time. My wife was gone for nearly a month this summer and hiked the West Coast Trail with friends among other things. And we've already pre-paid for most of a vacation to Florida next year during Spring Break.

We believe in spending wisely on ourselves and people around us. My wife is working on her Master's degree which we are 100% paying for (no workplace assistance). We have donated to a couple charities that we believe do good work, but we do most of our donating in December to minimize the lag between the donation and the tax credit.

Keeping spending to a reasonable level is easy because we don't have any debt. No lines of credit. No credit card balances. No bloated mortgages for overpriced real estate. No car payments. No student loans. Nothing. Having no debt substantially increases cash flow and allows for maximum savings without sacrifice!

If there's some advice I can pass along to people starting their financial journeys it is this:

  1. Look after your financial well-being first, no one will do a better job of looking after you than you.
  2. Avoid debt at all costs especially consumer and student debt.
  3. If you have debt, pay it down aggressively except for a reasonable mortgage.
  4. Always try to save more, you should save a minimum of 15% of each paycheque and preferably a lot more.
  5. Don't buy a house because everyone else is, do a thorough evaluation based on cash flow.
  6. Start investing as soon as you can, learn about investment options, and manage your own money.
  7. Be tax smart, I assure you our government does a mediocre job managing your tax dollars.

Comments & Questions

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Comments containing links or "trolling" will not be posted. Comments with profane language or those which reveal personal information will be edited by moderator.