When Angie O’Leary and her husband visited her in-laws’, they were shocked to find unpaid bills, twice-paid bills and tax forms scattered across the living room. It was the couple’s first inkling that something was wrong with O’Leary’s father-in-law, who was usually meticulous about financial matters and the home he shared with his wife.
Their concerns proved to be well-founded. O’Leary’s father-in-law was diagnosed with Alzheimer’s, the leading form of dementia in the U.S.
While many illnesses can be both physically and financially damaging to families, dementia is particularly destructive because of the duration of the disease and the high need for costly skilled nursing, says O’Leary, head of wealth planning for RBC Wealth Management-U.S.
In fact, next to a devastating long-term bear market, a dementia diagnosis is the biggest negative risk to retirees with assets in the $1 -2 million range, she says.
“We did some quick back-of-the-napkin math, and the out-of-pocket expenses for my father-in-law’s 12 years of dementia care came to more than $500,000—even with long-term-care insurance, which covered only about 20 percent of the costs,” says O’Leary. “We certainly didn’t expect that kind of price tag.”
Today, more than five million Americans are living with Alzheimer’s, according to the Alzheimer’s Association. That number is anticipated to double by 2040 because of the large cohort of aging Baby Boomers. Age is a primary risk factor for dementia.
Because the disease can be so financially devastating, even for families of means, RBC Wealth Management-U.S. recently commissioned a survey from Aon of 1,000 caregivers across the U.S. to better understand the financial impact of cognitive decline, so the firm and its advisors can better help individuals and families mitigate any financial risks.
The financial risks of cognitive decline survey looks at the behaviors of individuals with cognitive impairment that put them at risk, but also delves into the concerns and contributions of caregivers. The study found the top concern of those caregivers was that their loved one will outlive their savings, due to the huge lifetime cost of care for patients in cognitive decline.
“My father was diagnosed two years ago with Lewy Body Dementia and we’ve already purchased two walkers, a hospital bed, a stair lift and more because he and my mother want to continue to live in their two-story home as long as possible,” says Wally Chapman, regional director at RBC Wealth Management-U.S. “My mother is the main caregiver, my brother and I live nearby, and my sister recently visited for six weeks from Boston, so we tag-team to help out. We also have a caregiver come to the house eight hours a day a few times a week.”
So far, Chapman’s parents’ savings have covered their expenses, but they know they’re early in the journey. As such, Chapman and his siblings frequently have family meetings to discuss options.
“As a family we discussed my parents’ choices before the diagnosis and they’d put a deposit on a continuing care community that’s under construction,” says Chapman. “That was the right plan, but it didn’t factor in a dementia diagnosis, so we’ll likely revisit that decision in the future.”
The rising risk of bad financial decisions
The study also identified a propensity for individuals with cognitive impairment to make financial missteps. In fact, 80 percent of caregivers surveyed said they witnessed some level of financial mismanagement by their loved one.
For Nancy Carlson, an author and illustrator of children’s books, her husband Barry McCool’s diagnosis of frontotemporal degeneration (FTD), a form of dementia, was both financially and emotionally devastating. McCool’s dementia led him to rack up a mountain of credit card debt and unpaid loans and taxes. After seven years of caring for her husband, Carlson was left with a financial disaster.
McCool served as Carlson’s business manager and managed their personal finances. Beginning in 2008-2009, Carlson’s book contracts and speaking engagements started to dry up. At first, Carlson assumed this was because of the recession, but soon she discovered a series of bad financial decisions that were impacting not only her business, but the couple’s financial stability. The dementia diagnosis explained the situation, but it took years after his death to finally settle her debt and back taxes.
Carlson and McCool’s plans to travel, buy a vacation cabin, pay for their children’s college and help them buy homes were derailed by the disease and the financial burdens it created.
“This isn’t the future I thought I would have, but it’s OK,” says Carlson. “We have different things now and they’re just as fun. But I do think greater awareness and planning around the impact of this disease is a good thing for people to understand.”
Wealth planning to protect the family
It is rare that anyone factors a dementia diagnosis into their wealth plan, but given the rising prevalence of the disease, it may be a good idea to at least consider doing so – even for families of means.
“No one wants to be forced into making choices about the place of care for their family members, so making a plan in your 30s or 40s or 50s and revisiting it annually is important,” says Chapman.
Financial planning, after all, is a tool to prepare for the expected, such as college tuition and retirement, as well as the unexpected, such as early retirement due to illness or a job loss.
Planning also helps address some of the false assumptions that seem to accompany a cognitive decline diagnosis. For instance, many families of means assume they can cover whatever expenses may come, but they generally are underestimating those costs.
“A dementia diagnosis can be financial devastating as Medicare and traditional insurance do not cover daily care costs,” says O’Leary. “And most families don’t realize you need to completely drawdown your personal wealth before there is any government aid.”
To help clients better prepare for these costs, RBC Wealth Management is encouraging its advisors to have more proactive discussions with clients around the impact of a potential illness, such as dementia, on their plan.
“We can model the cost of a dementia diagnosis in a wealth plan to look at the benefit of long-term care insurance,” says O’Leary, adding that new long-term care insurance products have hybrid features and can offer a death benefit or cash value if long-term care is not required.
Chapman says he and his family immediately purchased long term care insurance for themselves and their spouses after their father’s diagnosis.
Financial impact on caregivers
The financial impact of cognitive decline isn’t isolated to just the individual affected by the disease, however. Caregivers, too, carry a financial burden – one they are seldom prepared to manage.
More than 16 million Americans provide unpaid caregiving to someone with dementia, according to the Alzheimer’s Association, and that number will only continue to increase.
The new study found that caregivers make a financial contribution of nearly $750 per month on average to support daily expenses, an amount that increases at different stages of cognitive impairment. By the time the affected person reaches severe decline, expenses for caregivers are estimated to climb to $1,200 per month.
“These aren’t just one-time expenses,” O’Leary points out. “Caring for someone with cognitive decline can last five to 15 years.”
This can result in more than $750,000 in cumulative direct and indirect expenses, the RBC Wealth Management-Aon survey found.
Caregivers are more likely to be female and are more likely to feel the impact of caregiving on their work at an earlier point than men, according to the survey. Female caregivers also typically begin caregiving at an earlier stage in the diagnosis than men.
Nearly two fifths of female caregivers say they changed their work pattern, with 26 percent leaving the workforce entirely and nine percent switching to part-time work, both of which have short- and long-term impacts on their finances. The survey estimates that withdrawing from the workforce costs caregivers an average of $35,000 annually.
Perhaps that’s why nearly half (48 percent) of caregivers believe their financial circumstances could be improved, a percentage that rises to 55 percent among caregivers who are under age 55.
O’Leary points out that leaving the workforce doesn’t only affect a caregiver’s current income, but can have impact on future Social Security benefits, which is why it’s important to explore options for care.
“We can develop a robust plan based on the cost of skilled nursing where you live with the assumption that someone could be cared for at home for three years and then spend five years in a skilled nursing home,” says O’Leary. “We can also estimate a break in income because many caregivers take time off, cut back or stop working entirely.”
Communication between advisors and family members
Because financial mistakes are among the initial indications of dementia, financial advisors can play an important role in helping to identify early warning signs of dementia, says Chapman.
“One client told me her husband had been diagnosed with early onset dementia,” says Chapman. “Clients need to be honest with their advisors and advisors need to look for mental or physical signs of any issues and gently ask questions.”
Tara Ambrose, manager of Senior & Vulnerable Client Initiatives at RBC Wealth Management-U.S., agrees and suggests financial advisors ask to be introduced to other family members of their older clients to build relationships that may be necessary in the future.
“The complexity of a dementia diagnosis can be eased with proper planning, access to resources and the support of a financial advisor,” says Ambrose.
A financial advisor can work with a caregiver or someone else in the family to explore options, such as power of attorney over health care and their finances to help prevent fraud and financial abuse, Ambrose says.
Says Ambrose: “Waiting too long to take steps like these can have devastating financial impacts.”