Wondering if there is a Best Practice for Modeling LTC Costs in Pralana Online?
I tried the Build>Expenses>LTC and ran into a serious limitation.
1. It uses the default Withdrawal Priority which makes no sense (at least in my case) since I would always take it from my IRA and take advantage of the Medical Expense Tax Deduction.
What I would like to see is a column added for Source which would move money from the Source to the Cash Account.
**Entered a Usability Feedback for this to get it into the queue.
As a kluge, I setup a Scheduled Withdrawal from my IRA to my Cash Account to cover the funds needed. It works but now I have to update 2 entries as I look at the effects of needing LTC at different times in Retirement.
Wondering how others are modeling LTC expenses?
Yes, you would use the Scheduled Withdrawal Table. The tax law here is a little tricky so it's not clear that they should try to automate it. The main benefit of pulling from tax deferred is to use up the entire medical deduction. Beyond that, your income is climbing back through the normal brackets, but faster than normal because the medical deduction is phasing out by 7.5% for every extra $ of income. Your effective tax rate on a larger withdrawal is therefore 1.075 times the normal rate. So it would still be worth filling the 12% bracket beyond the medical deduction if you are normally in the 22% bracket because your taxes will effectively be 1.075*0.12 = 12.9%, but filling the 22% bracket to avoid the 24% later is pretty much pointless as the 22% bracket will be taxed as 1.075 * 0.22 = 23.65%.
@ricke Well, Pralana can manage the tax aspect just fine and I think having to make a Scheduled Withdrawal just adds a complication that will get missed as I update and copy Scenarios.
In terms of funding though: I don't see an option for a Reverse Mortgage in Pralana. Has anyone simulated that?
That said, I should have rephrased my question a bit:
- Do you use a single age for the start of LTC? Or look at Multiple Different Scenarios at different ages?
- Do you look at the worst case, both spouses needing LTC at the same time?
- Do you also combine this with the Death of a Spouse?
I find this one of the most challenging aspects of Retirement Planning!
Thoughts?
- Do you use a single age for the start of LTC? Or look at Multiple Different Scenarios at different ages?
- Do you look at the worst case, both spouses needing LTC at the same time?
- Do you also combine this with the Death of a Spouse?
I find this one of the most challenging aspects of Retirement Planning!
It's challenging because there is so much variation between people, between needs. The average person won't need LTC at all. But a large segment will need some. And a minority will need extensive amounts. That is why it is perfect situation for insurance; but unfortunately there seem to be lots of stories of companies not paying out, and I personally don't trust it will be there when I really need it. We don't need life insurance (which can include bundling with long term care.) So we're stuck; but in theory that's the best way to go.
So I self insure.
To get the amounts needed: I use the average costs tracked by Genworth (link). For each of us I use their vavlues for 2 years of assisted living and 1 year of private room nursing care, which is a very rough average of needs for those who end up needing LTC. Their calculator allows you project future costs, but since I do all my planning in current dollars, I just take the average now and factor in an additional 5% more than cpi inflation. The vanguard healthcare calculator (link) is very helpful for ltc estimation as well, and gives a lifetime lump-sum estimate for ltc based on demographics and health. I like the Vanguard one because it gives the average--but then includes the 10% and 5th percentile ltc expenses as well to you have some perspective on how high it can go at the extremes. The Vanguard LCT estimates are significantly lower than Genworth's for what it's worth: I think it's because they are looking at averages for everyone, including those who don't need it, not just those who need it. So a rational way to price it is to go between the average and the 10th percentile.
The second part of your question is how to save for it. Given I use a "safety first" approach, I maintain 100% of my future known expenses in safe assets like bonds. When possible I have exact liability matching: one exact bond per year for one exact year of expense. But, as mentioned above, there is so much variability if when and if we'll need it, and one or both of us may not need it at all. So I keep this amount in a liquid TIPs bond fund of a rough duration for our last years. I also take into account the social security and pensions and the selling of our house during this same timeperiod, which will pay for some of the long term care assuming the remaining spouse moves to a cheaper house. I discount that net amount back to present dollars. So the exact dates don't matter.
I do wonder whether I'm being too conservative by holding enough for three years each of long term care (minus ss, pension, selling house). But I don't really see a choice. And as you note in your question, I am still being very modest in not considering that both may die at once or need many more years of nursing care of assisted living than the 3 I've budgeted for.
Jonathan,
Thanks for the reply -- will check out the linked calculator.
FWIW, we use:
- Genworth, 3 years of SNF for each of us
- I have a LTC policy, my wife is not insurable due to pre existing conditions.
- We Self Fund the LTC costs for my wife, plus enough extra for me to cover the gap in insurance.
- Hold the LTC funds with a position of 60/40 (45% VTI, 15% VXUS, 40% VGIT). Not quite as safe as holding it in a TIPS fund but our funding ratio is over 120% so there is a built in buffer.
@caroblover, frankly sounds like you are in much better shape than I. Just having insurance for you takes care of much of the problem. Then on top of that you are covering you both for 3 years of the skilled care ('nursing home'). Using 60/40 for those funds, which seems perfectly suited given how far off it is and how much you have already "covered".
It will be interesting to see what the vanguard calculator generates for you. Their $ figure for me was so low I questioned it, though, and in the end went with the genworth 3 years, inflated 1% above general inflation. It's still daunting to think about having hundreds of thousands of dollars reserved for something I probably won't need.
We're planning on spending down to zero; so any unused parts of that money (which according to actuarial probability, will be a considerable part of it) might constitute my son's inheritance. If he's lucky enough we die quickly. 🙂
@caroblover There are instructions on modeling a reverse mortgage in the online user manual.
