One feature that we’ve kept on putting off adding to our retirement calculator till now is the ability to explicitly plan for long-term care. A reason for this is that it’s especially hard to plan for it. It’s not certain if any particular person will ever need it. Nor is it certain for how long they’d need it. Also, cash flow considerations can change drastically once care starts. Expenditure on some things will cease to be relevant, especially discretionary spending on luxuries. You should include ancillary costs in the overall cost of care, which is likely to be high if private.
Until very recently, the only way to plan for long-term care in EvolveMyRetirement® was to use its ‘lifetime contingency’ feature. This allows you to allocate an amount of spending that will be used in full during the lifetime of the plan. It represents spending on things you can’t predict, or that you may not yet have thought of. Unfortunately, this approach depends largely on guesswork. As uncomfortable a fact as it is to face, many of us will need to receive long-term care at some point in our lives. For this reason, we felt that it was important to add a feature into our retirement planning calculator that directly addressed this, eliminating the need for guesswork.
Life expectancy
If someone asked how long you were going to live, you might say you had no idea, or else make a blind guess. If you wanted to be more precise, you might check out your life expectancy using an online calculator. Life expectancy is the age that you have a 50% chance of reaching. The calculator might also give you an idea of the range of uncertainty, as well as the average life expectancy. Incorporating life expectancy and its uncertainties into EvolveMyRetirement® involves deriving probabilities from the mortality tables published by the Office for National Statistics. This all takes place behind the scenes.
You may be wondering why we’ve digressed from the topic of long-term care to that of life expectancy. The reason is that there’s a correlation between the start of care and life expectancy: most people only require such care near the end of their lives.
There’s a pattern to long-term care requirements
Modelling long-term care is more complex than modelling life expectancy. Unlike mortality tables, there aren’t published ‘care tables’ . So we looked for a way to determine data points we could derive from life expectancy. If you’re averse to all things mathematical, feel free to skip to the next section!
We found a very useful US study, as well as supporting data published by the NHS. These indicated the likelihood of needing care, and the likely number of years of care before death. We then sought to create a model based on the available data points.
The cited US study has three categories for long-term care: Low, Medium and High. In deriving our model and the default settings, we focused exclusively on the Medium and High categories. We made the simplified assumption of a normal distribution for the number of years before death that care starts. We found that the best fit involved a mean of 1 year before death and a standard deviation of 3. This distribution fit the available data points rather well. We interpreted a negative number of years to mean that the person in question will never need long-term care. We used this mean and standard deviation as the defaults for two new plan assumptions in EvolveMyRetirement®. The user can adjust these assumptions, even though we would not recommend they do so unless they believe they have more accurate data points.
Planning for long-term care in our retirement calculator
In the previous section we described the underlying assumptions and model that EvolveMyRetirement® uses around the start of long-term care. To make use of this, the first thing a user does is enter the potential annual cost of long-term care per person. There’s no one-size-fits-all cost for this. However the user should make sure that the cost includes everything the person would need, including treats, pocket money, etc. Although full-time care might not require a care home (at least initially), it’s best to assume it does for budgeting purposes.
The next thing to do is take a good look at spending. Some spending items would cease completely if a person went into full-time care. For joint spending (for a plan with 2 members), it might reduce if one member either died or went into care. Our retirement calculator now has the ability to mark a spending item as ceasing at the start of care.
For a very small number of users, it might be that their spouse is already in care. This can also be specified, for the member representing the spouse.
Dealing with a cash shortfall
In some cases, the costs of long-term care can be a serious drain on cash. Some people have to sell their home in order to pay care home fees. The approach taken by EvolveMyRetirement® is to treat the main home (if owned) as sellable, but only if none of the plan’s members are still living there. Should all members of the plan be in care, the home is not automatically sold, but only after exhausting other means of raising cash.
How to start using the long-term care features
Planning for care is available to both new and existing users of EvolveMyRetirement®. The only requirement is that they have a Premium subscription. They can then switch on the feature for a particular plan by checking a box on the Plan page. The relevant features are then seamlessly integrated into the rest of the planning process.