Does Your Financial Plan Have The Flexibility To Absorb Health Care Costs?

One of the most common events to disrupt a retirement plan is the need for long-term care for self or for aging parents.

According to the Canada Life and Health Insurance Association (CLHIA) three quarters of Canadians admit they have no financial plan to pay for long-term care if they need it (Leger Marketing Survey conducted on behalf of the CLHIA). Does your written financial plan make provisions for long-term care? Or for medical costs that are not covered by an employee sponsored benefits plan past 65, or outside of provincial plans?

We know that we are living longer and may well require assisted care, not to mention other annual medical expenses. The 2016 Projection Assumption Guidelines published by the FPSC and IQPF, encourages financial planners to assume, for instance, that there is a 25% probability that a 60 year old male will live to 94, a female to 96 and one of the spouses will live to 98. Do you have the confidence that your plan will provide you with sufficient income to see you well into late retirement? What if there is an age differential between you and your partner? This will extend your time horizon for planning purposes and must be factored in.

Individuals and couples might rely on the equity in their home to cover the cost of an assisted care facility. But, let’s not be too quick to build this in as the solution to cover this potential cost. John Klaas, Adjunct Professor, Rowe School of Business, Dalhousie University and long-time financial planning coach and educator, reminds us that the perfect storm is one person of a couple needing expensive care in a nursing home while the other is still healthy, living in the home and not ready to move. Therefore, selling the home is no longer an option although borrowing against it could be considered.

What contingencies can be built into your plan to absorb these costs and give you the peace of mind that you will not outlive your capital?

Out-of-pocket costs can be partially recovered as a tax credit when you file your personal tax return. You would receive a 20% tax credit (federal and provincial) if living in Ontario. Lee Tessmer, CPA, CA, a Tax Specialist with MNP LLP in Ottawa reminds us that expenses for medical care are treated as a non-refundable tax credit and not a deduction. The tax credit may not be worth as much as a deduction which means there may be net tax payable if you are withdrawing funds from registered plans to fund expenses. This will depend on your marginal income tax rate at the time. If claiming a tax credit please keep in mind that there is a threshold before the credit is available.

A long-term care insurance product could be purchased to provide funding for certain medical costs. Are you willing to sacrifice other expenses for the peace of mind knowing you have this coverage? It might be worthwhile to discuss solutions with an insurance specialist and examine the cost/benefit.

Do you have an asset that could be earmarked to fund costs? As mentioned above, the equity in the home should be considered when both partners move into an assisted care facility. However, when only one is in a facility, other sources need be relied on. Maybe the cottage could be disposed of? Or, are your children expecting to inherit this? Maybe it has already been placed in a trust for them?

Does your retirement projection reflect a surplus of investable assets in late retirement that could be drawn on? I see individuals and couples who are fortunate enough to be accumulating wealth in their TFSAs and may never be dependent on them. As of 2016, an individual could have deposited $46,500 into their TFSA and can add $5,500 per year going forward under current legislation. Over time, a couple could see this pot of money grow into something sizeable and tax-free that could be set aside for possible health care costs. If drawing out of registered plans to cover these costs, consider that your marginal tax bracket at the time of withdrawal and OAS clawback implications.

Critical illness insurance to cover the cost of out-of-pocket cancer treatment, for instance, should be considered. Financial planning discussions with critical illness insurance as part of the agenda are becoming more common.

It is important to keep in mind that a disability may require modifications to a home which can be very costly.

Maybe your lifestyle budget builds in a generous amount for travel and these funds could be shifted to the cost of health care?

With growing longevity comes increased incidence of dementia, requiring health care. While our cognitive abilities may decline, our sense of confidence in our financial decision making abilities may not. (See Finke, Howe, and Huston August 24, 2011 – Old Age and the Decline in Financial Literacy.) We need to be sure we have trustworthy people involved in our lives who can help us avoid making poor decisions. Mr. Klaas points out that with cognitive decline on the rise, retirees need to be mentally engaged and have a sense of purpose. “Connections to people are crucial and repurposing skills into a second or third career can be satisfying.”

When building in a contingency to help fund health care for parents, start with a discussion with them about what their expectations and preferences might be. What financial resources do they have? Do they have a support network? Are you the only child or are there other siblings? Will you be the main person responsible for their care? Would this mean that you might need to take a leave of absence from work?   Do you have one living parent who might need to move into your home, in which case structural modifications to build in in-law suite would be required?

Whether for yourself, or your aging parents, a contingency for health care costs should be considered when reviewing your financial plan. It can’t be stressed enough that your plan needs to be designed with the appropriate level of thoroughness and due diligence.

Ross McShane, CPA, CGA, CFP, RFP, CIM is Director, Financial Planning at McLarty & Co Wealth Management in Ottawa, Ontario.