Rosalind Evans
As retirees navigate their golden years, the shadow of long-term care costs looms large, threatening to disrupt well-laid financial plans. Despite the joy of retirement, the possibility of incurring hefty expenses for long-term care often puts a damper on spending and gifting plans. The common fear revolves around the unforeseen burden of long-term care, as highlighted by the concerns raised during my presentations on this topic. This article delves into a strategic approach to alleviate these worries: the introduction of a fourth bucket in retirement portfolio planning.
The concept of the fourth bucket emerges against a backdrop of apprehension among older adults, as evidenced by an AARP survey revealing a widespread misunderstanding about government coverage of long-term care and a pressing concern about financing such care. Paying for long-term care is second only to inflation as a top retirement worry, according to a 2021 Society of Actuaries survey.
This gap in long-term-care insurance coverage, with only 7 million insured out of over 75 million Americans over 60, underscores the need for a practical solution. The proposed fourth bucket, separate from the spendable portfolio, is designed to earmark assets specifically for long-term care. This offers peace of mind and liberates retirees to spend or gift from their remaining assets without fear.
The traditional Bucket strategy, involving three buckets catering to short, medium, and long-term needs, is expanded with this fourth bucket. This new edition addresses the practicalities of long-term care funding: estimating costs, selecting appropriate investments, and deciding on the account type for holding these funds.
Financial advisor and doctor Carolyn McClanahan emphasizes the importance of considering individual health statuses in estimating the duration of long-term care, suggesting a five-year benchmark for healthier individuals. Moreover, the role of nonportfolio income, such as Social Security, in reducing the size of the long-term-care fund is crucial.
Investment strategies for the long-term-care bucket must be tailored according to age and proximity to needing care, with a keen eye on inflation, especially in the home-care sector. As for the account type, traditional tax-deferred accounts like IRAs are preferable due to tax considerations and the alignment with required minimum distributions in later life.
While a dedicated long-term-care fund may seem daunting, it offers a structured approach to a common retirement concern. For those needing more time to commit fully to this concept, alternatives such as home equity or residual amounts in the spendable portfolio offer fallback options. Preparing for long-term care is not just about financial planning; it’s about ensuring peace of mind and maintaining the quality of life in retirement.
