The Impact of Long-Term Care on Retirement

Selections from Society of Actuaries Monograph: Managing the Impact of Long-Term Care Needs and Expense on Retirement

Security: A Holistic and Multi-Generational View

Presented by Anna Rappaport and Karl PolzerModerator: John Cutler. Esq.

Long Term Care Discussion GroupJune 24, 2015

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Our Goals Today

SOA monographPresentations:

John CutlerAnna RappaportKarl Polzer

Questions

Managing the Impact of Long-Term Care Needs and Expense on Retirement Security: A Holistic and Multi-Generational View

12 papers in response to call for papers issued in 2013

Prizes awarded (total of $15,000)Presentations at NASI and SOA 2014 Annual

Meeting, and other venuesAll papers published by SOA in a monograph

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SOA MonographManaging the Impact of Long-Term Care

Needs and Expense on Retirement Security Monograph:

The collection of papers in this monograph explores the impact of long-term care needs and expense on retirement security from a variety of aspects.

The monograph can be found at: http://www.soa.org/Library/Monographs/Retirement-Systems/managing-impact-ltc/2014/mono-2014-managing-ltc.aspx

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Big Picture

The Impact of Long‐Term Care Costs on Retirement Wealth NeedsBy Vickie Bajtelsmit and Anna RappaportHow American Society will Address LTC Risk, Financing and RetirementBy John CutlerHow Adequate is Long‐Term Care Protection in Developed Countries?By Doug Andrews

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Caregiving, Family, Health

Improving Retirement by Integrating Family, Friends, Housing and Support: Lessons Learned From Personal ExperienceBy Anna RappaportThe 65+ Age Wave and the Caregiving Conundrum: The Often Forgotten Piece of the Long‐Term Care PuzzleBy Sandra TimmermanHome Equity and At‐Need Annuities—A Dynamic Long‐Term Care Funding DuoBy Steve CoopersteinLong‐Term Benefits May Reduce End‐of‐Life Medical Care CostsBy Stephen Holland, Sharrilyn Evered, and Bruce Center

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Insurance Background

An Overview of the U.S. LTC Insurance Market (Past and Present): The Economic Need for LTC Insurance, the History of LTC Regulation & Taxation and the Development of LTC Product Design FeaturesBy Larry Rubin, Kevin Crowe, Adam Fisher, Omar

Ghaznawi, Richard McCoach, Rachel Narva, David Schaulewicz, Thomas Sullivan, and Toby White

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Ideas for the Future

Financing Future LTSS and Long Life Through More Flexible 401(k)s and IRAsBy Karl PolzerThe American Long‐Term Care Insurance Program (ALTCIP)By Paul ForteHome Equity: A Strategic Resource for Long‐Term Services and SupportsBy Barbara StuckiAn Affordable Long‐Term Care Solution Through Risk SharingBy Kailan Shang, Hua Su, and Yu Lin

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SOA Paper Call and Monograph: Questions addressedHow can individuals and families protect themselves

from the expense of LTC needs?How can they protect against potential financial

ruin?How can advisors help their clients improve decision

making?Are their better ways to frame and communicate

challenges and possible solutions?Are there better product designs (private and

public)?Are there alternative financial approaches?How can individuals and families finance LTC needs

while addressing basic retirement income needs and asset protection? 9

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Long-Term Care and Retirement Security:What Are the Issues?Wealth needs of the individual, spouse and other generations of family are affected

Cost of a major long-term care event: depletes retirement assets for families who purchase services

Impact on the surviving spouse Added responsibility and financial burden placed on

caregiving family members Health and long-term care costs over what is planned for,

and they outpace general inflation Increased longevity: greater likelihood of needing care Limited participation by middle income earners in the

private insurance market

Also societal impact: On Social Security, Medicare, and Medicaid

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The Impact of LTC Costs on Retirement Wealth NeedsAuthors: Vickie Bajtelsmit & Anna RappaportBackground on retirement and long-term careDiscusses impact on womenSets up four methods for private financing of long-

term care Presents simulation research from SOA Retirement

Adequacy StudyProvides areas for further researchDiscussion also includes limited findings from

additional paper: Improving Retirement by Integrating Family, Friends, Housing and Support: Lessons Learned From Personal Experience

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Background

Major LTC event can devastate retirement security for most households. For households below median who need an extended stay in nursing home, Medicaid is probably only viable option.

Major private methods of financings LTC include insurance, savings, CCRCs, and use of home equity. Can be combined.

None of these match needs perfectly. Some have better chance than others.

Longest lived people most likely to have major needs.By age 80, 1/3 have some disability and by 86, majority have

disability.Women have greatest challenges.

Four Options for Financing Care

Insurance Savings CCRC Housing Equity

Prevalence

< 10% 15% of care pd out of pocket

Low, higher net worth only

Little use of reverse mortgages

When to do

While still healthy

Ongoing – all ages

Time of entry and monthly

When needed

Match to needs

Depends on contract, situation

No direct match

Depends on contract, situation

No direct match

Applies to Middle and upper income

Higher income and net worth

Higher net worth

All levels who own home

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Four Options for Financing Care (cont’d)

Insurance Savings CCRC Housing Equity

Risks Premium increases, costs exceed limits, situation not covered

Investment risk, may not have enough money, difficulty of managing assets

Monthly costs can increase, bankruptcy risk, don’t know if needs covered

Equity unmatched to need, illiquidity, interest rates affect reverse mortgages

Costs no LTC need

Premiums paid

None Buy-in price, higher monthly premiums

None

Issues for surviving spouse

Reduces risk of asset depletion

Survivor may not have enough assets left

Security of CCRC; higher monthly costs; possible relocation

Survivor may not have enough assets left

Taxation Some policies tax advantaged

Most retirement savings tax deferred

Part of price = insurance premium

Gain on sale of house often tax free

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Building Long-Term Care into Stochastic Retirement Modeling

EBRI model

Aggregate approachFocuses on entire

populationIdentifies % of

population who will not have enough money

SOA Retirement Adequacy Study

Individual approachFocuses on sample

individuals near the middle

Estimates how much money a household needs for retirement success

Both studies:

Shocks including long-term care are important Long-term care is a major factor in inadequate assets

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SOA Study: Effect of LTC Insurance on Retirement AdequacyWealth Needed at Retirement in 000s

Base Case:No LTCI

Buy LTCI for Both Spouses

Buy LTCI for Wife

Median family

Wealth at retirement: 50th percentile

$170 $227 $195

Wealth at retirement: 95th percentile

$686 $333 $338

75% family

Wealth at retirement: 50th percentile

$544 $599 $581

Wealth at retirement: 95th percentile

$1,011 $851 $871Median family: $60,000 income and $100,000 non-housing wealth75% family: $105,000 income and $250,000 non-housing wealth

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CCRC ObservationsCCRCs can offer very positive experience and

lifestyle for individuals with limitations, as well as good financial outcome, particularly for those who need care

There are several types of contracts – individual CCRCs often offer multiple optionsA: Lifecare or extensiveB: Modified contract: Limited long-term careC: Fee-for-serviceD: Rental

Advantages are promoted, but the risks are not well understood

Usually paid for by “up-front” payment plus monthly charge

Amounts paid in can be used to pay current expenses – flow of new entrants vital for financial stability

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Fee Examples – based on a NC CCRC

Unit and terms Entrance fee Monthly charge

Lifecare, larger one bedroom, 90% refund (Type A)

$318,000 plus $46,000 for 2nd person

$2,400 to $2,700 plus $1,100 for 2nd person

Lifecare, larger one bedroom, declining refund (Type A)

$185,000 plus $27,000 for 2nd person

$2,400 to $2,700 plus $1,100 for 2nd person

Fee-for-service, larger one bedroom, declining refund (Type C)

$109,000 (no added entry fee for 2nd person)

$2,400 for person 1, and $485 for add’l person.$4,400 per person in assisted living,$5,700 per person in memory care, $8,000 per person in nursing care

Fees seem to vary significantly by facility, some are for-profit and some not-for-profit, some have added support from contributions; what services are included also varies

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Comparison of Senior Housing OptionsIndependent

LivingAssisted Living

Nursing Home

Meals/day Often 1, varies 3+ 3+

Personal care No Limited Yes

Medication mgt No Yes Yes

Mobility ass’t No, but supports limitations

Yes Yes

Activities Yes, may be extensive

More limited Appropriate to situation

On-site nurses No Yes Yes

Monthly costs (GAO study – 2009)

$900 to $2,700 $4,700 to $6,500 $8,100 to $10,700

CCRC’s combine different levels of support.These options are very different from active 55+ communities

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Conclusions/Issues for Action

EBRI and SOA-RA models include long-term care and health risk in broader retirement simulation models. Many models exclude these risks.

Results are very different when these risks are included. Huge difference between 50th and 95th percentile because of shocks.

If stochastic modeling does not include LTC, point out limitations and be careful how used

Planning strategies like changing retirement age or reducing spending help at the median but can’t handle the full impact of shocks.

Advance planning for LTC very important for low and middle income households.

LTC insurance can be useful for those in middle-income brackets.

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Conclusions

Good options for care available for affluent. Much more limited for those without money.

Be careful about paying entry fees.CCRC is a major financial commitment, and may have

some hidden risks.Market is evolving and individual needs change.Moving may involve major downsizing.Living choices may involve multiple transitions at

unexpected times.Better resources needed to evaluate alternatives.