Retirement planning should include long-term care costs
Many Americans have a blind spot when it comes to retirement planning: long-term care costs. Even though the majority of Americans will at some point need long-term care, few are planning for it. Many underestimate the costs and mistakenly believe health insurance can help cover it.
"This is not like being struck by lightning. It is something we will all face in our lives," said Bruce Chernof, president and CEO of the SCAN Foundation, which researches care for older adults. "If we don't need it ourselves, it is likely that our spouses, our significant other or our parents will. One way or another, it will touch the lives of every single American."
The U.S. government estimates that 70 percent of people aged 65 today will require some form of long-term care during their lives. Most of the time, that type of assistance is non-medical, including help with daily tasks such as bathing. The need can arise unexpectedly after a major illness or even suffering an injury from a fall.
The costs of such care can easily outstrip retirement savings: A 65-year-old today can expect to incur $138,000 in long-term care costs over their lifetime, according to a 2017 Bipartisan Policy Center report. Two-thirds of Americans age 40 and up say they've done little or no planning for their long-term care needs, according to a poll conducted this year by the Associated Press-NORC Center for Public Affairs Research, with funding from the SCAN Foundation.
Here is some guidance on how you can get a jump-start on planning.
GET A REALISTIC PICTURE OF THE COSTS
This is something people can do easily and early. AARP has a long-term care calculator that lets people find the average costs for different types of services by state and metropolitan region, based on research by Genworth Financial. The most expensive option — a nursing home— now costs an average $97,000 a year, according to Genworth's 2017 survey of long-term care costs. Assisted living facilities — for those who can't live independently but don't require skilled nursing care — cost about $45,000. For those seeking to remain at home, hiring a home health aide or homemaker services will cost more than $20 an hour. Other options include adult day health center, which charge an average of $70 a day.
Younger adults should remember that costs are rising. Genworth has a cost calculator that gives estimates on what prices will be in 30 years.
LEARN THE TRUTH ABOUT FINANCING
Many mistakenly believe Medicare or private health insurance will help pay for long-term care. Fifty-seven percent of Americans say they plan to rely on Medicare should they ever need ongoing living assistance, according to the AP-NORC poll. But Medicare does not cover extended nursing home stays or non-skilled living assistance, which make up the majority of ongoing care needs for the elderly.
More than 50 percent of Americans end up paying for long-term care out-of-pocket, according to the Bipartisan Policy Center report. That figure rises to nearly 70 percent for those receiving long-term care at home. Many Americans with severe long-term care needs quickly burn through their savings and end up turning to Medicaid, which is projected to account for 40 percent of national spending on long-term care services by 2030.
So it's a good idea to take the time to research Medicaid rules, particularly what sorts of assets you might have to spend down to qualify. Research how other long-term care financing plans can affect your Medicaid eligibility. For instance, annuity payments may count as income but reverse mortgage payments do not. The government website LongTermCare.gov provides a good overview of Medicaid long-term care coverage and eligibility.
Keep in mind that Medicaid regulations vary widely by state — and could change over time.
WHAT TO KNOW ABOUT LONG-TERM CARE INSURANCE
Only 11 percent of older Americans have private long-term care insurance, according to the Bipartisan Policy Council, and with good reason.
Simply put, premiums are too expensive for most people. Some estimates put average rates at up to $2,400 annually. Rates have increased significantly since long-term care insurance plans first came on the market about 30 years ago, largely because insurance companies saw fewer voluntary lapses than expected and made other mistaken price assumptions. For the same reasons, the number of insurance companies offering the policies has fallen dramatically.
The good news is that if you start early enough, there is plenty of time to research and make an informed decision about long-term care insurance. Consider your age and income level when considering whether to buy a plan. The younger you are, the lower your premiums will be. But you need to evaluate whether you can keep up with payments into retirement when your income is likely to be lower.
Consider hiring a financial expert to help you pick the right policy.
Growing in popularity are "hybrid" insurance products that combine death benefits or annuities with long-term care benefits. People like them because if the long-term care benefits are never used, heirs still receive the death or annuity payouts. But some financial advisers are wary of the plans because they are difficult to analyze.
TALK TO FAMILY AND CONSIDER WHERE YOU LIVE
Chances are high that relatives will be involved with long-term care, at least to some degree. Experts recommend having family discussions about long-term care preferences before a crisis occurs. For instance, you might be determined to care for a parent or spouse at home as long as possible before putting them in a nursing home. But would that person feel comfortable with a home health aide or an adult day care center while you are at work?
Where you live matters when planning for long-term care, especially if relatives live far away. Check out the condition of your home and if it can be modified to accommodate disabilities.