Tuesday, July 22, 2014

Your 457 Plan and Long-Term Care

A HUGE THANK YOU is owed to the 20 or so public sector employees (both active and retired) who took valuable time from their day to help me with the research presented here.  After hours of lengthy interviews, I was able to come up with a very important discovery, and that discovery is what the number 1 thing is that keeps most of you up at night, or at the very least, what that nagging feeling that follows you around is.

The information I’m going to share with you is part of a detailed guidebook that’s being written specifically for government workers and retirees.  I’ll be sharing it with you sometime in mid-August or early September.  


Most of you in government have already chosen to do something about the huge long-term care (LTC) costs that could potentially come your way.  You’re already self-insuring (intentionally or unintentionally) by contributing to your 457 deferred compensation plan.  There’s the real possibility that by the time you reach retirement, you’ll have saved $200,000-$300,000 or more in your deferred comp plan alone.  There’s also a good chance that your home mortgage will be paid off, meaning if you aren’t already in great shape financially, you probably will be.  
If you’ve done a good job saving and investing in your 457 plan, and through some research you’ve learned that the average annual cost of a private nursing-home room in 2013 was over $94,0003, then you know that if you only spend a couple of years in a nursing home, you’ll be burning through close to $200,000 of your retirement nest egg. 
Realistically, the self-insurance route could work and many of you are taking this path whether you know it or not.  You may even be subconsciously thinking that your 457 plan is your long-term care piggy bank.  The good part is at least you have some type of plan in place because a long-term illness or injury doesn’t wait around to hit you until you’ve saved enough money or bought an insurance policy.
If you only spent around $200,000 of your $300,000-$400,000 in savings on long-term care, then it’s realistic to guess that you and your spouse could still be okay financially for the rest of your lives.  It will be a bit of a tightrope act, but you should be able to get by.  After all, with things like deferred comp, IMRF or a similar pension, Social Security, and little to no debt, you have some room for a heavy financial hit. 
HOWEVER, you have to be very careful here because the cracks in the foundation of your strategy show when you need more than a couple years of care, and what can happen is your $300,000-$400,000 deferred comp plan or other savings will dry up in a hurry.
 Another thing you have to seriously consider is if your spouse gets sick or injured and needs long-term care for a year or two, how much of your deferred comp or other savings are you comfortable spending just on health expenses?  Are you willing to say goodbye to your hard-earned dollars that you’ve sacrificed so much for?  What if you want to pass your wealth onto your kids or grandkids?  Just one extended illness over a year or two means you and your family could be out of money quickly.
Also keep in mind that more than 70 percent of you over the age of 65 will need long-term care services at some point in your life1.  If that doesn’t get you thinking, then there’s really no reason to read on.  If it does, then also consider this: Those of us who reach the age of 65 have a 40 percent chance of entering a nursing home, with a 20 percent chance of staying there for at least five years2.  What this means is the chances are pretty good that you’ll need expensive care for some amount of time during your life.
If you think your deferred comp plan, IMRF or other pension, and Social Security will be enough to cover living expenses and LTC costs, then you’re probably okay going the self-insurance route.  Just make sure that you...


  • $94,170: Cost of a private nursing home room 
  • $82,855: Cost of a semi-private nursing home room 
  • $41,124: Cost at an assisted living facility 
  • $29,640: Cost of a home health aide 
  • $18,460: Cost of adult daycare       

If you decide to self insure against the potential of paying these costs, just be very careful of a few things:

1)   Your IMRF or other pension and Social Security could get trimmed or more likely, lose ground to inflation
2)   An illness or injury lasting a couple of years or more could wipe out your savings
3)   Illness and injury don’t wait around until you’re prepared financially

If you’ll be self-insuring, be sure you are saving away into your 457 deferred compensation plan or other accounts and you’re doing it efficiently from a tax standpoint (read Attack of the Tax Zombies Parts I & II for more information on tax efficiency and your 457 plan).  IMRF's Voluntary Additional Contributions program is a great way to save efficiently for retirement, but consult with your tax advisor before diving in.  Anyway, self-insuring is a slippery target, but there are things you can do to improve your chances of saving enough money to pay for long-term care.  I’ll be spelling out these strategies when I complete the long-term care guidebook for the public sector and I’ll be passing the information on to you, so stay tuned.

So…How Much Does Long-Term Care Insurance Cost?

The answer to this question depends on so many different things so the only thing I can give you is what the 2014 average cost for men and women is expected to be.

In 2014, the average cost of an LTC policy for a single male age 55 with $164,000 of benefits is expected to be $925 a year.  If the age 55 male adds an option to have his benefit amount rise every year with inflation, then the average cost jumps to  $1,7654.        

Women, who received two-thirds of the LTC benefits paid out in 2013, pay higher premiums than men.  A single woman age 55 will pay an average of $1,225 a year for $164,000 of benefits in  20144.

A married couple each buying $164,000 of coverage that rises every year with inflation will pay an average of $3,840  annually4.

How does $164,000 of benefits breakdown to daily coverage?  It comes to about $150 a day in paid benefits for three solid years, which is a decent amount of coverage. 

If one of your fears in life is running out of money during retirement, even if you have a pension and hundreds of thousands of dollars in your 457 plan, then it’s time to at least start planning for this possibility.  You can do this by taking a very easy step, which is listing everything that you own then compare it to the average long-term care costs I gave you, and just pay close attention to how you feel.  Are you close to 100% confident that whatever unexpected illness or injury comes your way, you’ll be able to handle the cost of care for more than a year?  How about 2 or 3 years?  What about more than 5 years?  Or do you have even the slightest feeling of uneasiness or worry about long-term care?  If you do, then figure out how you’re going to get your comfort level as close to 100% as possible.  There are a good handful of ways of doing this and I’ll be showing you how in the upcoming months.

P.S. - If you found the content useful, please SHARE this with someone you know in the public sector, whether they are working or retired.  You can share by posting this link on Linkedin or your favorite site.  The information here will get a lot of people to start seriously thinking about potentially devastating long-term care expenses.

1 2014 Medicare & You, National Medicare Handbook, Centers for Medicare & Medicaid Services, September 2013
2  U.S. Department of Health and Human Services
3 John Hancock 2013 Cost of Care Survey
4 2014 Long Term Care Insurance Price Index, American Association for Long-Term Care Insurance

Securities and advisory services offered through Ausdal Financial Partners, Inc.  Member FINRA/SIPC 5187 Utica Ridge Road Davenport, IA 52807    563-326-2064  www.ausdal.com.  Public Retirement Planners, LLC and Ausdal Financial Partners, Inc. are separately owned and perated.

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