Costs in sunset years can be hefty

Author: David Aston Opinion

Source: The Toronto Star

Funding the cost of residential care late in life is a looming challenge to planning your retirement.

Care costs often arise in the sunset years and can be hefty. But you can't reliably predict what care you will need, when it might start, how long you'll need it, how much it will cost, or even if it happens at all.

So how do you plan for that?

It doesn't make sense to build a specific scenario for care directly into your financial plan since it's so uncertain.

But if you have the financial resources to swing it, it's smart to have backup assets like a paid-for home that can be tapped to fund care costs only if and when that becomes necessary.

Retirees of average means won't necessarily be able to afford all the private care they might want, but backup assets can cover much of those needs while also providing financial flexibility.

Funding the gaps in patchwork care

The residential care network of in-home care, retirement homes and long-term-care homes is a patchwork mix of public and private services, as described in my recent column.

In Ontario, the province provides limited amounts of in-home care. It also provides heavily-subsidized long-term care homes for seniors needing a lot of care. But if you want more extensive in-home care or want to live in a retirement home suited to relatively active seniors, then you pay for it yourself.

But private care in the GTA is expensive. Paying directly for in-home care by a personal support worker (PSW) costs $35 to $40 an hour with a two to four-hour minimum shift.

Retirement home costs start at about: $3,500 a month for independent living (with common meals but no PSW help), $4,700 a month for assisted living (with fairly basic care), and $8,500 a month for memory care (with a lot care).

A smart strategy for Canadians of average means is to make the most of government-supported care where available and supplement it judiciously with care paid for out of your own pocket. Of course, the wealthy can afford a lot more private-pay services, while low-income seniors are more heavily reliant on the public system.

Coming up with a lot of unplanned funding for private-pay care late in life can be a challenge, so this is where having backup assets comes in.

The most common backup plan relies on equity in a paid-for home. If you want to stay in your home and need funds to pay for in-home care, you can borrow against the equity using a reverse mortgage or home equity line of credit (HELOC).

If you want to move to a retirement home, you can sell the family home and use the proceeds to help cover the retirement home's often-hefty monthly fees.

While the classic backup plan is based on home equity, you can also use ownership of a cottage or other real asset, or financial assets held in reserve (that you're not already counting on for other purposes).

While high care costs are among the most visible threats, backup assets can be used flexibly to help offset any financial setback or serve any purpose. However, be cautious about using up assets early in retirement, lest they not be there later when you might need them more.

If you never encounter high care costs or other financial stumbling block, then you can enjoy using your backup assets for the rest of your life and potentially provide a sizable bequest to your heirs.

Since this strategy relies on tapping into valuable assets, it won't help renters without much financial resources. Nor will it help homeowners who need to tap into their home equity to just cover basic living expenses.

And other strategies to help cover care costs are possible. One alternative is to buy long-term care insurance, which I will discuss in a future column.

Backup asset example

To illustrate how the backup asset strategy can work, I use the fictional example of Susan, a fairly typical 65-year-old single GTA resident of moderate means who is about to retire.

Susan has $500,000 worth of invested savings, a condo worth $700,000, no debts and no employer pension. She is in good health and would like to stay in her home as long as she can.

She expects to generate a steady $42,000 a year plus inflation adjustments to cover her retirement living costs (including taxes) based on her current lifestyle. That includes combined annual CPP and OAS indexed government pension payouts of about $22,000, plus savings drawdowns that start at $20,000 a year and increase with inflation.

That $42,000 annual cash flow translates into $3,500 a month, sufficient for what many would consider to be an adequate but fairly bare bones retirement lifestyle in the GTA.

Susan plans to live in her condo indefinitely - ideally for life if she stays healthy. So there is nothing built directly into her financial plan to sell her condo or use its equity. But she realizes that if her circumstances change and she needs extra funding, the equity in her condo can back her up.

If Susan later wants money for in-home care, she could borrow up to perhaps $385,000 against the value of her condo using a reverse mortgage. Assuming PSW costs of $38 an hour, that could provide about 20 hours a week of PSW time for almost 10 years. (For simplicity, in this and the next scenario, I express all financial figures in terms of today's dollars and assume they all grow by the same rate of inflation.)

Alternatively, Susan could sell her condo and use the proceeds to help pay the ongoing costs of a retirement home.

If she netted $650,000 after transaction and moving costs, that could potentially give her $6,000 of added monthly cash flow for about nine years.

On a combined basis, that could be expected to generate about $9,500 a month for not quite a decade ($3,500 a month in ongoing drawdowns from savings, plus the nine-year top-up of $6,000 a month derived from condo sale proceeds). That could go a long way to covering costly care options. For example, it should be sufficient to cover the cost of many private memory care facilities for the nine years (including a modest allowance to cover other personal expenses).

While that strategy can be effective in paying for private care needs, it's important to acknowledge that it won't necessarily fund all the private care you might want for as long as you want it.

So you may still need to find the right tradeoff between spending a lot on care in a short period for maximum immediate benefit versus stretching the money out more slowly to make it last.

This article was written by David Aston Opinion from The Toronto Star and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.