Growing Old is Expensive

The HumbleDollar.com published an article by John Lim in late March 2022 about the costs of growing older, including the expense of long-term care.

“Such care isn’t cheap,” writes Lim. “By some estimates, the average 65-year-old can expect to incur $138,000 in long-term care (LTC) expenses, with half of that cost borne by families.” The costs can be much higher than that.

Lim outlines the primary ways people pay for LTC: Self-funding followed by Medicare once your personal assets are gone; traditional long-term care insurance – this option can be very expensive and out of reach for most; hybrid policies that combine life insurance or tax-deferred annuity policies (read the fine print carefully, cautions Lim).

Lim proposes a fourth option to consider. He writes that this option addresses the primary risk in retirement—longevity. While most people hope for healthy longevity, if your age outlives your assets and/or you require expensive care, longevity can become very difficult.

Lim’s fourth option centers on deferred income annuities (DIAs). DIAs are sometimes called longevity insurance.

Despite the name, Lim describes DIAs as “a bread-and-butter income annuity with one quirk: The annuity doesn’t pay out immediately, but only after a delay. For example, you could buy a DIA at age 50. In exchange for a onetime lump-sum payment, you’d receive an income stream for life. That income stream wouldn’t begin until, say, age 75.”

Lim goes on to state that the spending shock of the cost of care in late retirement can also wreak havoc for the surviving spouse. A DIA helps defray the cost of long-term care and provides an income floor if your savings are depleted.

“What if I need long-term care before I reach 75?” asks Lim. Your other assets would be called upon to fund long-term care costs without the help of the DIA. But when the DIA starts contributing at age 75 and beyond, it relieves that stress on your other assets.

Lim writes that other advantages of DIAs are that they are simpler to understand than long-term care insurance or hybrid policies.  Keep in mind that approximately half of the population won’t require long-term care.  “If you’re in that lucky pool,” adds Lim, “a DIA is not money wasted. It will help fund your retirement late into your golden years, while reducing the worry of depleting your portfolio.”

John Lim is a physician and author of ‘How to Raise Your Child’s Financial IQ,’ which is available as both a free PDF and a Kindle edition. Follow him on Twitter @JohnTLim and check out his earlier articles. You can read his full article about DIAs at https://humbledollar.com/2022/03/paying-for-aging/