I write a lot aboutthe state of retirement in America and how certain saving behaviors can helpset you up for success. But until recently we hadn’t fully addressed theelephant in the room: the costs of health care and long-term care inretirement. In our recently published paper, Planning forHealth Care Costs in Retirement, my colleagues and Iaddress both of those topics. Today I thought I would focus on long-term care.
Every time wepresent the paper at conferences or to groups around Vanguard, people approachme afterward with stories, mostly tragic, about their personal life experienceswith long-term care. It’s made me think a lot about my own family’sexperiences.
A tale of two grandmothers
My grandmothers’lives present a tale of two extremes.
GrandmaYoung—Lucille—worked as a secretary for Kraft, which was rather unique at thetime. Lucille viewed my grandfather’s salary as “their” money; however, hersalary was “her” money to spend as she desired. She loved to travel, and shespent “her” money on the annual trips my grandparents took.
Lucille wasdiagnosed with Alzheimer’s disease at age 72 and required around-the-clock carethat my Grandfather Young—Lyman—provided in their home. She lived for two yearsbefore succumbing to the disease. Imagine the cost of her care had it not beenfor my grandfather. While I never heard him complain, I wonder about the tollit took on him.
At the oppositeextreme was Grandma Baker—Ella Margaret—a real pistol! Ella Margaret was ascratch bowler. She also volunteered at the Ida Benderson Senior Center inSyracuse for as long as I can remember. In fact, back in the day, if she didn’tanswer her phone, I always knew I could find her at the senior center.
Grandma Baker livedindependently until she was 96, and she was active and mostly healthy. She felland died soon after reaching that remarkable age, never needing long-term care.It’s a very different story than Grandma Young’s.
I wonder—will I bea Grandma Young or a Grandma Baker? Will I suffer Alzheimer’s and end up in anursing home someday? Will there be a Grandpa Young to take care of me? I haveno way of knowing.
The most troublinglong-term-care stories seem to stick with us. So, when we talk about long-termcare, we tend to jump to the worst-case scenario.
Daniel Kahneman—theNobel Prize-winning pioneer in the field of behavioral economics—said that weoften jump to conclusions on the basis of limited evidence. He coined a term todefine that bias: WYSIATI (wiz-ē-ŏt-ē)—what you see is all there is.
Because theworst-case scenario is so emotionally intense and makes such an indelibleimpression, we tend to think that’s the norm. We’re not good at putting thesesituations into context. In fact, after reading this blog post, you’re probablygoing to remember the amount of care Grandma Young required. And you’re goingto remember the amount of care other people in your life have needed as well.
You’re only human, after all
It’s human natureto automatically recall the worst-case scenario, but the news about long-termcare isn’t all doom and gloom. When you’re thinking How can I prepare for the possibility of long-term care?,how you frame thediscussion is what matters. At Vanguard, we want to frame the costs oflong-term care in a model that can help people take action, not scare the heckout of them.
Here’s the reality:Our research shows that half of us will neverneed paid long-term care, and just 15% are likely to incur costs of $250,000 ormore. The rest of us will fall somewhere in between.*
Concentratingsolely on the worst-case scenario—the big scary numbers—isn’t useful to anyone,as Stephen Weber notes in his blog post about health care costs inretirement.
Saving as much asyou can for as long as you can and not panicking about the “what ifs” is thebest way to factor long-term care into your health and wealth planning. (Formore information about preparing for financial security in retirement, see thisblog post by Colleen Jaconetti.)
Let’s break it down
If you think aboutpaying for long-term care for yourself or for someone in your family, you canquickly get overwhelmed, just as you would if you had to pay for your house inone lump sum, or cover your food and clothing costs for the rest of your lifeall at once.
But that’s not howit works. We pay for those things a little at a time—a monthly mortgagepayment, a weekly grocery bill, a monthly clothing budget. When you think ofbreaking down the cost of long-term care as an annual expense, rather than as alump sum—that big scary number—it helps you better understand how much youmight spend each year during retirement, so you can begin to plan for that.
For example, ourresearch found that 26% of retirees can expect some long-term-care costs of upto $100,000.* If you break that down over the course of 10 years, that’s$10,000 a year, or just over $833 a month. For context, households run bypeople age 65 and older spend an average of $1,322 a month on housing.**
Although $100,000is still a lot of money, when you view it this way, it doesn’t seem quite asoverwhelming.
What you see ISN’Tall there is
In the end, wecan’t predict if we’ll be a Grandma Baker or a Grandma Young—or if we’ll have aGrandpa Young! We can make a few assumptions—our health and family historyoffer hints—but we won’t truly know until the future becomes the present forus. What we can dois begin to factor the potential costs of long-term care into our retirementplanning and make incremental progress toward our goals. Me? I’m going to doall I can to stay healthy, active, and engaged.
And even though itmay go against everything you’ve heard and what you think you know, try to put long-term care inperspective. Prepare as best you can. Plan and save to the extent possible.Then get out there and enjoy life.
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