Monte Carlo Simulation

Monte Carlo Simulation is a cool, powerful, and simple method for modeling seemingly random scenarios. Today, I’ll go over the basics of Monte Carlo simulation. We’ll walk through a simple example together. And then I’ll link to some of the cool ways I’ve used Monte Carlo here on the Best Interest.

Table of Contents

The Basics of Monte Carlo Simulation

When you hear “Monte Carlo simulation” you should think “lots and lots of random trials.”

For example, you might ask, “How often does a Texas Hold ‘Em player get dealt two aces?” A true statistician would be able to use statistical equations to answer that question.

But you could also use Monte Carlo analysis. You could teach a computer to randomly deal a two-card hand, and then repeat than random dealing another billion times. Over those billion random trials, an accurate probability of a two-ace hand will become apparent.

Cards and dice and darts are easy targets for Monte Carlo simulations. But they can also be used to on more complex models, such as weather predictions.

What are spaghetti plots? | firstcoastnews.com

For example, the “spaghetti plot” above is a product of a Monte Carlo simulation. Meteorological models utilize fluid dynamics—which is famously unpredictable. That “unpredictability” can be tamed using the Monte Carlo method!

Unsure whether the winds will shift faster or slower? Simulate both a million times. East or West? Warm water or cold water? A hurricane’s path might depend on a million different variables. Monte Carlo simulations can take those million inputs, vary them millions of times, and then output a huge range of results.

One set of inputs says, “Miami, get crushed.” Another set predicts the hurricane won’t even make landfall. Over millions of simulations, a probability distribution emerges. Miami might only get crushed in 0.001% of the results—it’s probably safe.

Monte Carlo Simulation Origin and Naming

You might recognize Monte Carlo as the name of the famous casino in Monaco. Indeed, the two mathematicians (including the famous John von Neumann) who developed the Monte Carlo method named it after the gambling house.

But their original purpose for Monte Carlo simulations was anything but fun and games. They were working on nuclear weapons at the Los Alamos National Laboratory.

Unsure how deep a high-energy neutron will penetrate fissionable uranium?

Just simulate its random path a billion times.

Monte Carlo Simulation – Finding Pi

Let’s put the Monte Carlo method to work!

The mathematical value π, or pi, is the ratio of a circle’s circumference to its diameter. The ancients—Egyptians, Babylonians, Greeks, Indians, Chinese—all realized that understanding pi was essential to mathematics, astronomy, and engineering.

But the problem is figuring out exactly what the value of pi is. We now know that it’s 3.1415926535…but how could we find that out without a complicated algorithm?

One answer, as you might guess: a Monte Carlo simulation.

The Monte Carlo Simulation Setup

This simulation is beautifully simple.

Imagine a 2 x 2 square. And inscribed in that square is a 2″ diameter circle. It looks like this.

Each small square is 1 x 1. We know that the area of the full square is 2 x 2, or 4 square units.

We also know that the area of the circle is π*r^2, where r is the radius of the circle. Conveniently, the radius here is 1. Therefore, the area of the circle is pi square units.

Now let’s introduce some Monte Carlo simulations. Imagine I had a million monkeys randomly throwing darts at this target. How many darts would we expect to land inside the circle?

The percentage of darts inside the circle would be equivalent to the area of the circle divided by the area of the square. 100% of the darts land in the square, but a lesser percent end up in the circle.

If the circle occupies about 70% of the square, then we expect about 70% of the darts to hit inside the circle. Makes sense, right?

Conveniently, we already know that ratio of areas. It’s equal to pi (the circle’s area) divided by 4 (the square’s area). If I had a million (or billion, or trillion) monkeys throw their darts into the square, the percentage of darts that land inside the circle would be equal to π/4.

If I take that percentage and multiply it by 4, then I’m just left with π. And that’s that.

I’ve discovered π.

Finding Pi in Action

Let’s get those monkeys working!

100 Darts

To keep things simple, let’s start with 100 darts. I ran one trial of 100 darts and 79 of them ended up inside the circle. If we use our equation above, we take 79/100 and multiply it by four. That gives us 0.79*4 = 3.16.

Our first estimate of pi is 3.16.

I could run this Monte Carlo simulation again and—perhaps—only 72 darts end up in the circle. Or 75. Or 81. There’s a random element at play here. Small data sets—like only 100 darts—are typically more affected by randomness than larger data sets.

That’s why Monte Carlo simulation is all about the power of big numbers. As we throw more darts, the noise of randomness becomes increasingly quiet. And it’s easy for computers—in this case, the software MATLAB—to simulate lots of monkeys throwing lots of darts.

100,000 Darts

So, next I asked my MATLAB monkeys to throw 100,000 darts.

78,535 darts land inside the circle, which means this estimate for pi is 3.1414.

10,000,000 Darts

For good measure, let’s do one more. I’m going to employ every monkey on Earth, all ~10 million of them. I’m not even going to show you the target, because it just looks like a block of blue dart holes.

7,854,485 of the darts land inside the circle. That’s higher than most monkeys can count.

This estimate for pi is 3.141794.

The actual value of pi is 3.141592…

Out of 10 million darts, the monkeys hit the target about 600 times more than expected, for a percent error of 0.0006%. Not bad.

P.S.—For every dart, I randomly assigned it a landing point on the board, and then did some quick math to ask, “Is this dart inside the circle?” That math was calculated for each of the 10 million simulated darts. It took MATLAB 66 seconds to do all that math. Computers are fast.

1000 Trials, 100,000 Darts Each

One last simulation. This one will show you the variation that can occur from one trial to the next. 1000 trials, each of 100,000 darts.

Below is a histogram showing the frequency of results from those 1000 trials.

Some monkeys walk away thinking pi is 3.12. Others think 3.16. But a clear and correct pattern emerges when all the data is examined. The most likely value of pi is right around 3.14.

Monte Carlo Simulations and Money

Why did I bother writing about Monte Carlo simulations today? Am I suggesting that your best bet in personal finance is understanding the roulette table?

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No, not at all. Most of the “secrets” of personal finance are simple, and most of your personal finance goals should be basic.

But Monte Carlo simulations have financial use (albeit limited) when the exact results of a future scenario are unknown and/or completely random. For example, the stock market!

Now, I know that some detractors will immediately have a visceral reaction to the idea of simulating the stock market. I understand. And I address those concerns below.

But if we are to believe that the stock market has a significant aspect of randomness to it, then a Monte Carlo simulation should help us understand a possible range of outcomes in the future. It could even help us create a probability distribution of possible outcomes.

For example, the last of these five helpful plots uses Monte Carlo simulations to examine portfolio performance.

And this updated Trinity Study 4% Rule also uses randomized Monte Carlo simulations to examine how the “4% rule” of retirement might change in the future.

Did you read the results of the Best Interest stock picking competition? I won’t spoil the results. But it’s a perfect example—and a great lesson—in simulation randomness.

But you can’t model the stock market!!

To the detractors—I understand. Anyone who builds simulation models for a living will tell you that the downfall of models is “garbage in, garbage out.”

Imagine I go back to the Monte Carlo model that predicts how often I’ll deal two aces. An important assumption that goes into that model is that a deck has 52 cards. Another important assumption is that 4 of those 52 cards are aces.

If I get those assumptions wrong—say, 4 aces out of 42 total cards—then my result will be completely wrong. My mistaken input—garbage in—will lead to an incorrect output—garbage out.

The same thing happens when simulating the stock market, except the market is significantly more complicated than a deck of cards. Anyone who tries to model the market—including yours truly—is getting something wrong. For example:

Is picking stocks just like a coin flip?

Is a ‘random walk’ truly random?

Do stock returns best fit onto a Gaussian distribution, a Laplacian distribution, or an Orstein-Uhlenbeck distribution? (Yes, the sharp nerds at Reddit called me out on this one.)

These are all good questions, and they rightly poke holes in my attempts to model markets using Monte Carlo simulations.

That’s why I constantly nag you to use boring investing methods. Just index and chill.

While I (obviously) think Monte Carlo simulations have their place, I’m not putting all my trust into dart-throwing monkeys. Nor should you.

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Randomness happens, and Monte Carlo simulations can help tame that randomness.

I hope you continue to roll the dice and return for future Best Interest articles. If you’re feeling really lucky, consider signing up to get these articles dealt straight to your inbox.

Tagged model, monte carlo, simulation, stock market

Source: bestinterest.blog

Long-Term Care Options and How to Plan for the Costs

Think for a minute about all the things you did when you woke up this morning. You probably got out of bed, walked to the bathroom, cleaned yourself up, brushed your teeth, got dressed, made yourself some breakfast, and headed out the door to go to work. These activities of daily living are so routine, you likely did them without even thinking about it.

Now imagine that you couldn’t do these things on your own. It could be because you’ve had an accident, you’re recovering from an operation, or you have an illness that limits your mobility. Whatever the reason, you now need help from another person to do many or even most of your basic daily activities — and you’ll continue to need it for weeks, months, or even years.

This kind of help is called long-term care, and there’s a good chance you or a close loved one will need it at some point in your life. According to the U.S. Department of Health and Human Services (HHS), a person who turned 65 today has almost a 70% chance of needing some form of long-term care in the future.

Needing long-term care isn’t just a physical burden; it’s a financial one too. According to the 2020 Cost of Care Survey by Genworth Financial, professional long-term care can cost anywhere from $1,603 to $8,821 per month. Most employer-sponsored health insurance plans don’t cover these costs, and even Medicare provides only limited coverage.

If you don’t want to risk being bankrupted by long-term care costs in the future, you need to do some planning now. Even if you don’t think you’ll need long-term care for many years to come — or at all — it’s better to think about it ahead of time than to take a chance on having to deal with both a health crisis and a financial crisis at once.

Options for Long-Term Care

When many people hear “long-term care,” they immediately picture a nursing home. However, it’s possible to receive long-term care in a variety of settings, which differ widely in terms of both comfort and cost.

The main forms of long-term care are:

1. In-Home Care From Relatives

Dealing with a long-term injury or illness can be a lot less stressful in your own home with familiar things and people around you. Thus, one common type of long-term care is to have a relative or friend tend to your needs at home.

While unpaid in-home care is easiest on the person receiving care, it can be difficult for the caregiver, both emotionally and financially. A 2018 Genworth study found that more than half of family caregivers had high levels of stress, and roughly one-third said their careers had suffered on account of their caregiving duties.

2. Home Health Aides

If you want to receive care at home without putting a burden on your relatives, you can hire someone to help you. A home health aide doesn’t provide medical care but can help with such daily tasks as bathing, dressing, and eating. The 2020 Genworth survey found that the median cost of a home health aide in 2020 was $24 per hour, or $4,756 per month.

3. Homemaker Services

Some people don’t need help with bathing or dressing, but they still need someone to handle daily chores they can’t manage on their own, such as cooking, cleaning, and running errands. For this, you can hire a homemaker service, which costs a bit less than a home health aide. Genworth put the median cost of homemaker services for 2020 at $23.50 per hour, or $4,481 per month.

4. Adult Day Care

Some older people can still get up and about, but they can’t be on their own for long periods of time. An adult day care program is a place where adults can go during the day and spend time with others, with a caregiver there to keep an eye on them. Adult day care programs can offer structured activities, meals, transportation, and sometimes health services. They’re cheaper than most long-term care options, at around $74 per day or $1,603 per month, according to Genworth.

5. Assisted Living

Home health aides can help with daily activities, but they can’t provide actual medical care. People who need regular medical supervision are better off moving to an assisted living facility. This is a place where people can live on their own in private apartments and have access to both personal care and medical care on site. The median cost for an assisted living facility was $4,300 per month in 2020, according to Genworth.

6. Nursing Home

Nursing homes provide the highest level of supervision and care. These all-inclusive facilities offer room and board, personal care, supervision, activities, medication, rehabilitation, and full-time nursing care. This level of care comes with a high price tag, however. Genworth found that in 2020, a semi-private room in a nursing home cost $7,756 per month, and a private room cost $8,821 per month.


Government Programs

Most Americans can’t afford to pay for professional long-term care out of their own pockets. A 2020 survey by The Ascent found that over half of Americans have less than $5,000 in savings. Roughly one-third have less than $1,000 — not enough to pay for even a single month of long-term care.

Government programs, including Medicare and Medicaid, can help you meet some of the costs. However, these programs offer only limited aid. Each one has specific rules about who qualifies for benefits, what services it covers, how long you can receive aid, and how much you must pay for on your own. If you need long-term care, it’s certainly a good idea to look at these programs first to see what they cover, but it’s a mistake to rely on them to pick up the whole tab.

Medicare

In most cases, Medicare does not include any long-term care benefits. However, there are several specific exceptions:

  • Skilled Nursing Facility (SNF) Care. If you come out of the hospital after a stay of at least three days, Medicare provides partial coverage for up to 100 days’ worth of medically necessary care while you recover. To receive this coverage, you must enter a Medicare-certified SNF or nursing home within 30 days after you leave the hospital. Medicare covers all of your treatment there for the first 20 days of your stay. Beginning on day 21, you must pay a daily copayment, which is set at $185.50 in 2021. Medicare covers any cost beyond this copayment up through day 100. If you still need care after that, you’re on your own.
  • Rehabilitation. If you have a condition that requires ongoing medical care to help you recover, Medicare provides partial coverage for a stay in an inpatient rehabilitation facility. It covers the cost of treatments such as physical therapy, meals, drugs, nursing services, and a semi-private room. However, you must pay an out-of-pocket cost for this care that depends on the length of your stay. For the first 60 days, you pay a $1,364 deductible. This cost is waived if you’ve already paid for a hospital stay for the same condition. For days 61 through 90, you pay $341 per day. After day 90, you start using up your “lifetime reserve days.” You have only 60 of these days over your lifetime, and each one costs you $682. If you still need care after your 60 days are used up, you must pay the full cost. Also, any extra costs during your stay — such as a private room, private duty nursing, or a phone or television in your room — are your own responsibility.
  • Home Health Services. You can also use Medicare to pay for in-home care for a specific illness or injury. This includes part-time or intermittent skilled nursing care, physical or occupational therapy, and speech-language pathology. To qualify as part-time, your care must cover less than eight hours per day, or less than seven days per week, over a total of three weeks or less. If you are receiving this type of in-home care, Medicare also pays for additional, basic care from a home health aide. Medicare does not cover care from a home health aide if that’s the only care you need, and it does not cover homemaker services under any circumstances.
  • Hospice Care. People who are terminally ill sometimes choose to spend their last days in hospice care. Hospice treatment focuses on relieving the patient’s pain, rather than trying to cure them. Medicare covers hospice care for patients who are terminally ill, are not seeking a cure, and do not expect to live more than six months. Patients can receive this kind of care in their own homes, a hospital, or another inpatient care facility.

For more details about what Medicare covers, see the Medicare website.

Medicaid

Unlike Medicare, Medicaid covers all types of long-term care. This includes both in-home care — such as a visiting nurse or a home health aide — and care in facilities such as nursing homes. You can get home health aide services from Medicaid even if you don’t need skilled care as well, and you can get care in a facility even if you aren’t recovering from a hospital visit.

However, Medicaid has strict limits on eligibility. You can’t receive Medicaid benefits if your income is above a certain level, which varies from state to state. Also, in some states, you cannot qualify unless you have dependent children. You can find the limits for your state through your state’s Medicaid website.

Veterans’ Benefits

The Department of Veterans Affairs (VA) covers the full cost of long-term care for veterans who have disabilities resulting from their military service. It also covers costs for veterans who can’t afford to pay for their own care. Other veterans receive some coverage, but they must pay a copayment. According to the VA site, the current copayments for long-term care are:

  • $97 per day for inpatient care, such as nursing home care
  • $15 per day for outpatient care, such as home health care or adult day care
  • $5 per day for domiciliary care in a special facility for homeless veterans

The VA site has more information about the health benefits available to veterans and how to qualify for them.

OAA Programs

Some states have their own separate programs to help provide care for adults over age 60. These programs get funding from the federal government under the OIder Americans Act (OAA). The OAA supports a wide network of state, local, and tribal agencies called the Aging Network. It works with tens of thousands of service providers and volunteers to deliver various types of care, including:

  • Meal delivery
  • Transportation
  • Home health services
  • Home health aide and homemaker services
  • Adult day care
  • “Respite care,” which gives family caregivers some time off from taking care of an older relative
  • Help using other government benefits

You can find programs in your area through Eldercare.gov.


Products to Help You Pay for Long-Term Care

Government programs don’t cover everybody, and the coverage they offer isn’t always enough to pay for the full cost of long-term care. To make up the difference, some people carry long-term care insurance, which provides coverage for this specific type of care. Others rely on other financial products designed for senior citizens, such as annuities and reverse mortgages, to cover their costs.

Long-Term Care Insurance

Long-term care insurance, or LTC insurance, works like other types of insurance. You pay a premium each month to the insurer, and if you ever need long-term care, it covers the cost. However, one big difference between this and most other types of insurance is that you have to qualify to buy a policy. If you’re already in poor health, there’s a chance you won’t be able to get a policy — and if you do, you’ll have to pay a steep price for it.

There are several ways to buy a long-term care insurance policy. The most common sources for policies are:

  • Insurance Specialists. You can buy LTC insurance through financial professionals such as insurance agents, brokers, and financial planners. To find insurance companies that offer LTC insurance, visit your state insurance department or do an Internet search for “long-term care insurance” plus the name of your state.
  • Employers. Although standard employer-sponsored health care plans don’t cover long-term care, many employers — including the federal government, many state governments, and some private companies — offer LTC insurance as an add-on that employees can purchase separately. To find out whether your employer offers this coverage, check with your pensions or benefits office.
  • Organizations. Some labor unions and other professional or trade organizations, such as the National Education Association, offer LTC insurance as a benefit to their workers. Membership organizations such as alumni associations or service clubs like the Lions and Elks can also take part in group plans.
  • State Partnerships. In some states, you can purchase LTC coverage through a State Partnership Program. These programs provide benefits partly through private long-term care insurers and partly through Medicaid. You can learn more details about these programs from the Department of Health and Human Services (HHS).

Although long-term care coverage can protect you from devastating long-term care costs, most Americans don’t carry it because of its high cost. According to the American Association for Long-Term Care Insurance (AALTCI), the typical annual premium for an LTC policy ranges from $1,400 to $3,100. This annual cost varies based on factors such as age, health, gender, location, and amount of coverage.

Financial planner David Demming, speaking with Policygenius, says LTC insurance is most likely to be a good deal for people aged 50 to 55 with a net worth between $1 million and $3 million. That’s enough money to afford the premiums, but not enough to cover the full cost of long-term care. To get a clearer idea of what LTC policy pricing could be for you, check out online calculators like this one from Genworth.

Annuities

Some people choose to fund their long-term care through an annuity, a financial product that pays out a fixed sum every year over a specific period. There are three kinds of annuities you can use for this purpose:

  • Immediate Annuities. With an immediate annuity, you pay a one-time premium, and in exchange the company pays you a fixed monthly benefit. This benefit can last for a specific period of time or the rest of your life. One advantage of an immediate annuity is that anyone can buy one, regardless of health status. This makes it a good option for people who no longer qualify for LTC insurance due to poor health. However, the fixed monthly sum you get might not be enough to meet your long-term care costs, and inflation can eat into its value.
  • Deferred Annuities. You can buy a deferred annuity with either a one-time payment, like an immediate annuity, or a series of regular payments. The money you pay into the annuity earns interest and grows tax-free. It doesn’t start paying out a monthly benefit until a specific date, such as your 65th birthday.
  • Long-Term Care Annuities. A long-term care annuity is a deferred annuity with a long-term care rider. This type of annuity doesn’t pay out until you need the money for long-term care costs. To collect the monthly payment, you must be diagnosed with a medical condition that requires long-term care, such as Alzheimer’s disease. According to HHS, this type of annuity is usually available only to people age 85 or younger who meet certain health requirements. However, according to SmartAsset, it’s sometimes easier to get approved for a long-term care annuity than for LTC insurance.

Depending on your situation, an annuity can be a cheaper way to cover long-term care costs than LTC insurance. However, it typically requires a large up-front payment, which is even higher if you already have health issues. Also, annuities can have a complicated effect on your taxes — HHS recommends consulting a tax professional before you buy one.

Reverse Mortgages

Another way to pay for long-term care services is with a reverse mortgage through LendingTree. This is a special type of home equity loan available only to homeowners age 62 and up, which allows you to get cash out of your home without giving up your title to it.

The house remains your property until you die. At that time, it goes to the bank unless your heirs choose to pay off the amount you’ve borrowed and keep the house. Otherwise, the bank sells the house and keeps the amount you owed at the time of your death. Any cash beyond that balance goes to your heirs.

There are several ways to get cash from a reverse mortgage. You can get one large lump-sum payment, a regular monthly payment, or a line of credit you can draw on as needed. The second two options are most useful for paying long-term care expenses. As long as you spend the payments in the same month you receive them, the money is not taxable income and doesn’t affect any government benefits, such as Social Security, Medicare, or Medicaid.


Long-Term Care Planning

Dealing with long-term care can be an emotional and financial burden, both for you and for your family. The best way to lighten that load is to plan ahead. By making your plans early, you’ll have plenty of time to do research, make decisions, and buy traditional long-term care insurance or any other products you need to cover the costs.

1. Research Your Options

Start by looking into the options for advanced care in your area. Check the phone book or do an online search to find out what choices you’re likely to have for assisted living and nursing homes, as well as home health aide and homemaking services. The Genworth Cost of Care Survey tool can help you estimate what these services cost now and what they’re likely to cost in the future. You can also check the costs for services in other areas to figure out whether relocating would save you money.

2. Talk to Your Family

Once you have some idea of available options, talk to your family members and get their input. Set aside a time when you can talk everything over in person without having to rush. Here are some points to discuss:

  • Your Lifestyle. Discuss the way you live now and how you expect to live in the future. For instance, if it’s important to you to stay at home and live independently, let your family know that. Tell them about your priorities, and find out what’s important to them, as well.
  • Your Care Options. Show your family the research you’ve done on care options in your area. Tell them how you’d prefer to receive care and whether you have a specific provider in mind. Also, find out how much of your care your loved ones are able and willing to take on themselves. If you have several relatives who could help you, talk about which specific responsibilities each of them could handle.
  • Your Finances. Once you’ve considered what kind of care you want, talk about what it’s likely to cost. Let your family know how much money you can set aside now toward your future care needs, and find out if any of them are willing to contribute.
  • Medical Care. Make sure your family knows your health history in detail so they can supply it to a doctor if they need to. Also, make sure they know how to contact all of your current medical providers.
  • Legal Issues. Decide who should be responsible for making medical decisions for you if you can’t make them yourself. Use this information to set up a durable power of attorney for the future. Also, talk to your loved ones about your wishes for end-of-life care. If you already have a living will, tell them what it says and where to find it; if you don’t have one, make plans to set one up.

3. Calculate the Cost

Now that you have some idea who will provide care for you when you need it, the next step is to figure out how much it will cost. Even if your family has offered to provide unpaid care for you when you need it, there could still be some cost involved. For instance, you could choose to hire a house cleaning service so your loved ones won’t be responsible for all the housekeeping chores in addition to your care.

If you’re planning to pay for professional long-term care services, think about how long you’re likely to need them. According to the HHS, people who require long-term care use it for an average of three years. This includes an average of two years of in-home care and one year in a long-term care facility. About one in five people need care for more than five years.

To figure out the total amount you’ll need for long-term care costs, multiply the cost by the expected length of care. For instance, suppose a home health aide costs $60,000 per year and assisted living costs $90,000 per year. If you expect to need two years of home health care and one year in assisted living, you must save up a total of $250,000.

If the total cost looks like more than you can possibly afford, look for ways to save on long-term care. This could include relying on family care, negotiating prices, getting help from government programs, or relocating to a cheaper area.

4. Make a Plan to Cover the Costs

Once you have an idea of how much money you’ll need for long-term care, you can start figuring out how to pay for it. If your income and assets are low enough, you can look to Medicaid for help when you need care. State government programs could also provide some help.

By contrast, if you have a lot of liquid assets — that is, cash, retirement savings, and other assets you can easily convert to cash — you might be able to pay for your care out of pocket. Financial planners interviewed by Policygenius say this is most practical for people with a net worth of at least $3 million.

If you’re somewhere in between those two extremes, you’ll need some other way to meet the costs of long-term care. That could mean buying long-term care insurance, investing in an annuity, or taking out a reverse mortgage. A financial planner can help you compare these options and decide which one is best for you.

5. Put Your Plan in Writing

After you’ve come up with a plan to meet your long-term care needs, the final step is to put it in writing. Having a written plan gives your family something to consult if there’s ever any confusion or uncertainty about your wishes.

If you’ve decided to make a living will or set up a durable power of attorney, these documents should be part of your written care plan. Consult a lawyer to help you set these up. Give a copy of the entire plan, including the legal documents, to any relatives it could affect.

Putting your plan in writing doesn’t mean it’s set in stone. If your health or financial situation changes in the future, your long-term plans might need to change too. Update your plan as needed, and make sure your relatives always have the latest version.


Final Word

If you’re young and healthy, you may feel like it’s too soon to start thinking about long-term care. Since you probably won’t need it for many years, you figure you can just wait and deal with it when the time comes.

However, there are several good reasons why now is exactly the right time to think about it. First of all, the future is unpredictable. Even young people can suffer injuries or develop illnesses that keep them off their feet for months.

Also, LTC insurance gets more expensive and harder to obtain as you age. If you decide to wait until you’re 65 before buying a policy, it could already be too late to qualify. And even if you can get one, you’ll pay a much steeper rate for it than you would if you’d bought it 10 years earlier. So it makes sense to start thinking about this type of insurance and decide whether it’s for you before you hit age 55.

Finally, if you put off thinking about long-term care until you actually need it, you’ll have to make a whole lot of important decisions in a hurry. You could end up making choices that aren’t best for you because you don’t have time to weigh the options. By avoiding procrastination and thinking it through now, you can ensure that when — or if — you finally need long-term care, it will be as easy as possible for you and your family.

Source: moneycrashers.com

How to Make a Living Will

How to Make a Living Will – SmartAsset

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A living will is a legal document that allows you to specify the kind of care you’d like to receive in end-of-life situations. This is different from an advance healthcare directive, though either one can be an important part of an estate plan. If you’d like to draft a living will, you could get help from an estate planning attorney or you may try using an online software program to create one. Regardless of which one you choose, it’s important to understand how to make a living will to ensure that yours is valid and your wishes are upheld. A financial advisor can offer valuable insight and guidance as you make an estate plan.

What Is a Living Will?

Living wills can be used to spell out what type of healthcare you do or don’t want to receive in end-of-life situations or if you become permanently incapacitated or unconscious. This document tells your doctors and other healthcare providers as well as your family members what type of care you prefer in these situations.

For example, you can include instructions in your living will regarding things like resuscitation, life support and pain management. If you don’t want to be left on life support in a so-called vegetative state, you could communicate that in your living will. Or if you’re terminally ill and only want to receive palliative care you could include that as well.

A living will can be part of an advance healthcare directive that also includes a healthcare power of attorney. This type of document allows someone else, called a healthcare proxy, to make medical decisions on your behalf when you’re unable to. A living will typically only applies to situations where you’re close to death or you’re permanently incapacitated while an advance directive can cover temporary incapacitation. So if you’re unconscious after a car accident, for instance, your healthcare proxy could direct doctors regarding what type of care and treatment you should receive.

How to Make a Living Will

The first step in making a living will is deciding whether you want to do it yourself or hire an estate planning attorney. Making a living on your own using an online software program may cost less than paying an attorney’s fee. But if you want to be certain that your living will is drafted accurately and legally, you may feel more comfortable getting help from an estate planning professional.

If you choose to make a living will on your own, you can find the necessary forms online. Keep in mind that your state may have a specific form you’re required to use for your living will to be considered valid. There may also be minimum requirements, in some cases identical to what would be required for a simple will, you’ll need to meet to make a living will in your state, including:

  • Being at least 18 (or 19 in some states)
  • Being of sound mind
  • Having the will be properly witnessed
  • Getting the document notarized once it’s complete

Those are the technical aspects of how to make a living will. Your main focus may be on what to include. Again, your state may have a specific format you’ll need to follow. But generally, you’ll need to leave instructions regarding the following:

  • Life-prolonging care. You’ll need to decide what types of life-prolonging treatments, such as blood transfusions, resuscitation or use of a respirator, you do or don’t want to receive.
  • Intravenous feeding. You’ll also need to specify whether you want to be given food and water intravenously if you’re incapacitated and can’t feed yourself.
  • Palliative care. If you’re facing a terminal illness, palliative care can be used to manage pain if you decide to stop other treatments.

It’s important to be as thorough and specific as possible when outlining your wishes so there’s no confusion later on. This ensures that your wishes are carried out and it also relieves your loved ones from the burden of having to guess at what you do or don’t want.

What to Do After Making a Living Will

If you’ve drafted a valid living will according to the laws of your state, the next step is to make your wishes known to other relevant parties. This includes passing copies of your living will to your doctors, hospital and loved ones. If you’re drafting a living will as part of an advance healthcare directive, you’d also want to make sure your healthcare proxy has a copy.

It’s also important to review your living well regularly to make sure it’s still accurate. If you change your mind about the type of care you’d like to receive, then you’d want to update or rewrite your living will to make sure that’s reflected. If not, then your doctors and loved ones would be left to carry out the terms of your original living will, which may conflict with what you actually want.

Who Needs a Living Will?

A living will is designed for people who have specific wishes regarding care in situations where they have a terminal illness or become permanently incapacitated. If you’re comfortable letting your loved ones decide which type of care should be given to you, then a living will may not be necessary. On the other hand, if you absolutely don’t want a certain type of treatment then a living will is the best way to make that clear to your doctors and family members.

You might consider drafting a living will along with a healthcare power of attorney to ensure that all of the bases are covered, so to speak, when it comes to healthcare decision-making. Having a healthcare proxy can ensure that the terms of the living will are upheld and they can also make decisions about your care for you in situations where you’re only temporarily incapacitated. When choosing a healthcare proxy, it’s important to select someone you can rely on to adhere to your wishes.

The Bottom Line

A living will can be an important part of preparing your family for your death. This kind of document is a relatively straightforward legal document that you may consider including in your financial plan or estate plan if you have specific wishes regarding end-of-life care. Knowing how to make a living will and what it covers can help you decide if it’s something you need to have in place.

Tips for Estate Planning

  • A living will is not the same thing as a last will and testament. Living wills cover healthcare decision-making while a last will and testament deals with the distribution of your assets once you pass away. A will is important to have, since without one your assets are distributed according to the inheritance laws of your state. An estate planning attorney can help you draft a last will and testament as well as a living will. Or you can use online will-making software programs to create a simple will on your own.
  • Consider talking to a financial advisor about whether a living will is something you need. If you don’t have a financial advisor yet, finding one doesn’t have to be a complicated process. SmartAsset’s financial advisor matching tool can get you personalized recommendations, in minutes, for professional advisors in your local area. If you’re ready, get started now.

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Rebecca Lake Rebecca Lake is a retirement, investing and estate planning expert who has been writing about personal finance for a decade. Her expertise in the finance niche also extends to home buying, credit cards, banking and small business. She’s worked directly with several major financial and insurance brands, including Citibank, Discover and AIG and her writing has appeared online at U.S. News and World Report, CreditCards.com and Investopedia. Rebecca is a graduate of the University of South Carolina and she also attended Charleston Southern University as a graduate student. Originally from central Virginia, she now lives on the North Carolina coast along with her two children.
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