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Question from Patricia Docking, 59, of Vancouver: My husband, age 62, and I, age 59, are retired with pensions and investments that provide us with a comfortable middle-class retirement. We are planning to give periodic lump sums to our two children and fund RESPs for our grandchildren (two so far) but don’t want to leave ourselves short for potential end of life needs. We want to self-fund these – no insurance. How do we figure out what would be a reasonable amount to keep aside for potential long-term care?
Ms. Simmons helps everyday people survive the new economic climate through personal finance, ethical investing and small business advice.
Shannon Lee Simmons is a financial planner and founder of The New School of Finance in Toronto.
This is a very important question. The average cost of accommodation in long-term care facilities can range between $2,000 and $5,000 a month, depending on the type of care and type of facility. For a more detailed look at how much it could cost you, check out the Globe’s long-term care cost calculator. But the bottom line is - expect it to be expensive.
1. The first thing you want to do is figure out how much of your government and private pensions would go towards funding care. For example, if you receive $2,000 a month in pensions and want to budget $4,000 a month for long-term care, you are short $2,000 a month or $24,000 a year, after tax. This is what you’d need to pull from your portfolio.
2. Estimate how long you think you may be in long-term care. Yes, this is a total buzz kill. But, given your family history, do you think you’d be in long-term care for ten, 15, 20 years? In our example, let’s assume 15 years.
2. Figure out much this differs from the amount you are currently pulling from your portfolio and how much of that you'd still need to spend if you were funding medical care. If you are currently using $30,000 a year to fund your lifestyle and assumed that you would continue to require the $30,000 while undergoing long-term care, the the additional $24,000 cost of care would come out of the portfolio as well as the $30,000 for a $54,000 annual withdrawal. Keep in mind, these amounts will go up with inflation. If; however, you think that you would no longer maintain the same lifestyle if you were funding long-term care (less travel, less entertainment, less gifting etc), than the amount could be less. If, for example, you assumed that your lifestyle costs would decrease from $30,000 to $20,000, the total amount from the portfolio would be $44,000 ($20,000 + $24,000).
3. Calculate the amount of money in current dollars that will allow you to access this additional income throughout retirement. This is the amount of money, plus what you need to support your regular retirement, that cannot be gifted away. You may want to get an unbiased financial planner to help you with this calculation to ensure that you don’t put your retirement safety at risk.
4. In addition, put aside a minimum of $30,000 for additional medical treatments outside of provincial coverage or for medical equipment not covered by government programs. This could be more for you depending on your family medial history and medical issues and diseases you may be combating.
Once you've got the following, you can start gifting:
1. Enough money in savings to support regular retirement plans.
2. Enough money in savings to support additional withdrawals for long-term care, in addition to your retirement plans.
3. Additional savings earmarked for medical emergencies and equipment.
You may never need to use this money, but knowing it’s there in case you need it will help you sleep at night!
This interview has been edited and condensed.