Libertea: Can you expand on how you calculated the extra $50,000 for the stash to self-insure? Am in the same situation and trying to figure out those calculations now so I can plan for the future.
You do the calculation for LTC needs similarly to how you do it for calculating your retirement or educational funding needs. It is probably most similar to educational funding in that prices are wildly overinflated; people have the option of funding their LTC goal via a lump sum versus with monthly or yearly contributions (most people can't do that for retirement just like most people can't pay cash for a home); and there is a good likelihood that the money will not be needed for this purpose at all. It is more like retirement funding in that there is no set date the money will be needed (although you have a pretty good idea of when it would be needed); and there are a wide variety of ways to fund LTC, including annuities or whole life insurance as well as LTC insurance and self-insurance, among other possible but less common options.
Every option has its pros and cons. I pointed out two of the big cons to LTC insurance, which include high expense (this is not a cheap insurance like term life; this is very costly like DI), and a risk of default by your insurance company given the long time frame you are paying premiums. (Most people buy LTC insurance in their early 50s but don't use it for 2-3 decades if they do wind up using it at all, which is a lot of years to be paying such high premiums, particularly after retirement.) A major con of self-insurance that mathjak pointed out is the risk of superannuation (basically outliving your funds), but I would point out that this is a risk we all face regardless with our retirement savings, and it can be mitigated by over-saving for retirement/LTC needs.
Other factors of importance that I mentioned include your health status (now, and anticipated in the future), as well as your age. Health status is important for obvious reasons: if every relative on both sides of your family has a history of long NH stays, that raises the odds that you will. Likewise, if you have some kind of progressive, debilitating disease like MS, that raises your risk. Being female raises your risk since women live longer on average.
Age is important for the LTC question just like it is for the retirement question, which is why I gave my age: the fact that I'm 41 and not 61 or 21 makes a difference because of how it affects the time available for compounding. Along these same lines, it matters whether you're contributing a lump sum for LTC (as I am, which will require less money overall) versus funding the amount over time (an annuity). And if you are funding your LTC over time, will you fund the same amount every year until you contribute the whole amount , or will you increase your yearly funding with inflation (a growing annuity)? The longer the time frame over which you spread your payments, the more payments you will have to make, and the less help you will get from the growth of your money over time.
Now, here is how to do the Time Value of Money (TVM) calculation. You can do these steps for retirement or education funding as well, but the basic steps are the following:
Step 1: Set a timeline. In my case, as a 41-year-old, I conservatively likely have ~ 30 years until I would be likely to need LTC. If you are younger or older than I am, adjust your timeline accordingly.
Step 1a: Determine TVM variables. If you are not familiar with terms like present value, future value, payments, periods, and interest rates, you need to learn about these things before you can do the calculations. You will also need a financial calculator, of which there are several free ones online that you can find by googling. But they're cheap to buy also. Stop here if you don't know about TVM and learn about this first. Your calculations will only be as good as your assumptions for timeframe, inflation rates, interest rates, and current costs of LTC. (You should look up the current cost of the LTC you are trying to fund, whether it is NH or ALF care.)
Step 2: Once you know your costs, you can determine your gross dollar needs. If you want to get fancy, you can reduce this amount by SS, pensions, or other guaranteed funding that you will have. Or just leave it as a gross value to build in additional conservatism.
Step 3: Calculate the inflated amount (future value) for what your current LTC costs would be in the future (say, in three decades if you're around age 40 like me).
Step 4: Calculate the capital you need at that age, including with payments over the amount of time you wish to fund in the NH or ALF (commonly three years is used). Make sure to use the inflation-adjusted earnings rate. This is similar to how one determines college funding.
Step 5: Finally, you have to discount the capital need in the future to its present value so you can determine how much you need to contribute now (either as a lump sum or as an "annuity" of payments over time) to fund the full amount.
If you've never done these calculations before, you can hire a CFP to help you. If you do decide to get help, go with a fee-only planner - you may not need someone to manage your portfolio for you and otherwise perform other financial planning services.
Sorry if this is confusing, but I hope it at least gives an idea of how the process works.