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Saving and planning for long-term care needs

One of the great facets of retirement is the ability to simplify your expenditures. By that point in time, you've likely paid down the mortgage on your home, you're no longer on the hook for your children's post-secondary education and you have enough liquidity to shell out for a lavish vacation or even a new car up front.

But long-term care costs can quickly eat into your nest egg.

"Too often, people wait until an event's occurred to do something," says Ralph Vandervoort, a financial planner and proprietor of V Group Financial in Toronto. He cites the example of a British Columbia couple who, upon retirement, calculated their annual income needs at $16,000. After the husband suffered a heart attack, their income requirements shot up 250 percent.

"At that point, the word 'planning' is not appropriate anymore," Vandervoort says. "Then, you manage with limited resources."

The expenses associated with long-term care are considerable, so it's wise to prepare in advance for the possibility that you may have to pay for them, whether for yourself or an aging parent or relative.

Take the residency rates in a typical retirement home. In Ontario, for example, if you were to stay in a ward room (shared with three other people), it would cost you $1,400 a month; a semi-private room (shared with one other person) would be about $1,800 a month. A private room is in the neighbourhood of $2,100 a month.

Subsidies available based on income
"There are two sides to the equation," says Bill Gleberzon, co-director of advocacy for the Canadian Association of Retired Persons (CARP). "The one side is how much the province subsidizes, and what they subsidize for. And the other side of the equation is how much people have to pay out of their own pockets based on their income."

Each province subsidizes long-term care to a different degree. Ontario and Manitoba are among the more generous, while New Brunswick is the most tightfisted. In most cases, your ability to pay is based solely on your monthly income, such as your pension and investment earnings.

"You may live in [the ritzy Toronto enclave of] Rosedale and own six or seven buildings, but if your income is only $30,000 a year, your ability to pay is based on that," says Jill O'Donnell, co-author of "The Canadian Retirement Guide."

The more comfortable option for many retirees is to remain in their own home. But the expenses can be prohibitive.

"Living at home, if you have extra care, is costly," says O'Donnell. "If you've got a live-in [nurse], you're looking at $3,000 to $4,000 a month, plus you've got all your other expenses. If you have 24-hour care, on an hourly basis you're looking at $20 an hour."

Avoid cashing RRSPs
Many people believe that a medical emergency is the time to cash in their Registered Retirement Savings Plan (RRSP). Investment planners caution against it.

"Say someone needs $30,000 to pay for nursing care," says Vandervoort. "People say, 'Fine, I'll cash in my RRSPs.' Well, fine, you have to cash in $50,000 in RRSPs to pay the $30,000 bill." Because, depending on your marginal tax rate, the government could conceivably skim off $20,000 for tax.

When it comes to funding long-term care, financial planners generally advise clients to preserve assets like RRSPs or their homes. What you want is a product that's similar to an RRSP but doesn't have the same tax implications.

In "The Canadian Retirement Guide," financial professional John Page directs people to fixed-income investments. In this scenario, your principal remains secure, you generate regular interest income and there's the possibility of making capital gains when interest rates drop.

Examples of fixed-income investments include term deposits and guaranteed investment certificates (GICs), as well as more sophisticated instruments like Canadian and international fixed-income funds, Canadian, U.S. and international equities and real estate investment trusts (REITs). For current rates on GICs and other term deposits, check out Bankrate's GIC rate page.

Page recommends diversifying across these asset classes in order to minimize the effect of market dips and thus maintain the value of your holdings.

"By diversifying your portfolio with asset classes that are negatively correlated," he writes, "you can reduce the overall risk of your portfolio."

Insurance options
Another option is insurance. One product that is growing in popularity is long-term care insurance. You protect yourself against a future decline in health by buying coverage when you're in your 50s or even your 40s.

Your premium is based on your age and medical history; a healthy 65-year-old might pay $400 to $500 a month. Once you're unable to perform two or more of the daily activities of living -- like eating, dressing or bathing -- the insurer makes a payout.

The plan would pay out a daily fee -- such as $100 a day -- which could be used for either home or institutional care. This type of coverage has been available in the U.S. for many years but is relatively novel in Canada. It's currently only offered by two companies: Manulife Financial and RBC Insurance.

Another type of coverage is critical illness insurance, which offers protection in the event of such crippling circumstances as a heart attack, a stroke or cancer. (The plan covers about 20 conditions in all.)

Say you suffer a stroke. If you live 30 days after the incident, the insurance company will pay out a lump sum, generally between $100,000 and $1 million (based on your premiums). In order to qualify for this coverage, you must undergo an assessment to determine that you're not immediately at risk of disease or that your family medical history doesn't suggest you're preordained for trouble.

Premiums range from $600 to $1,600 a year, depending on your age and the size of the payout. This money could cover any loss of income or medical expenses, such as an unplanned stay in a U.S. hospital.

Whichever option you decide is best for your circumstances, remember that retirement planning is governed by one simple cliché: It's never too early to start.

"I'm trying to encourage people who are 25-plus to think about their future," says O'Donnell. "For the 25-year-old, when they are ready to retire, it could be that the government won't be subsidizing as heavily as it has been in the past."

See part one of this two-part series about long-term health care on Bankrate.

Andre Mayer is a writer in Toronto.

-- Posted: Oct. 1, 2004
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