Long-Term Care Expenses in Retirement



Thad Ismart, CFP®
Senior Financial Planner

More than 70% of people over the age of 65 will need some sort of long-term care during their lifetime. In addition, there is a 40% chance that you will enter a long-term care facility if you reach the age of 65, and a 20% chance of staying there five years or longer. Even though the average stay in a long-term care facility is two-and-a-half years, any length of stay can take a toll on your retirement savings.

The average daily rate for a Maryland nursing home is $260, or $94,900 annually. Other forms of long-term care might not be as financially devastating, but they can still significantly deplete your assets. Assisted-living facilities, where people can get help with routine daily activities and chores, are much less expensive, averaging $46,800 annually. For those who choose to stay in their homes, a home health aide can assist them for about $20 an hour. Another option, adult day care, also allows a person to stay in her home for an average cost of $79 per day, or $20,540 annually.

PAYING FOR LONG-TERM CARE

After deciding which form of long-term care is needed, the question of how to pay for it still remains. There are four primary ways to pay for long-term care: Medicare, Medicaid, self-insuring, and long-term care insurance. Medicare will cover up to 100 days of long-term care, but only if you have previously been in a hospital for three consecutive days prior to needing longterm care services. In addition, only the first 20 days are covered in full—the remaining 80 days require a co-payment. Medicare is not an option if the long-term care needed is truly “long-term.”

Medicaid was designed to help those with limited resources and limited incomes. Many Americans want to avoid depleting their assets and resources, as Medicaid requires, so that they can pass their assets on to their heirs. In addition, individual choices are limited under the Medicaid program. Not all long-term care facilities participate in Medicaid, and many that do participate limit the number of Medicaid occupants.

Self-funding is for those who have significant invested assets and/or substantial fixed income, such as a pension. This option is especially attractive to those who would be turned down for other options due to medical reasons. However, an extended stay in a long-term care facility could significantly deplete your assets. The greatest risk exists for married couples where one spouse has an extended stay in a long-term care facility. For example, if one spouse requires an extended stay in a nursing home due to dementia, she could be there for 10 years or more, costing around $1 million. While she would be covered by Medicaid should their assets be depleted, the healthy spouse would no longer have assets at his disposal for living expenses.

A long-term care insurance (LTCI) policy pays a specified daily amount for nursing home care for a specified number of years or for the policyholder’s lifetime. An LTCI policy typically covers care in other settings as well, such as the home or an assisted living facility.

LOOKING MORE CLOSELY AT LTCI

The three principal reasons to purchase LTCI are to preserve your assets for your spouse or heirs, to make sure that you can choose where and by whom your care is provided, and to protect your family from the consequences of providing you with long-term care.

LTCI has four key components, and the LTCI premium is affected by the amount of coverage you purchase in each category.

  1. Daily benefit: the amount of benefit paid by the insurance.
  2. Benefit period: the length of time the insurance will be paid.
  3. Compound inflation protection: your daily benefit will increase by a fixed percentage each year until you enter long-term care.
  4. Elimination period: the period of time after you enter long-term care and before the insurance company begins to pay benefits.

A “shared care” policy could help reduce the cost of LTCI. With this type of policy, a married couple purchases one policy and splits the benefits between them. For example, if a couple buys a benefit period of six years and one spouse uses two years of coverage, the second spouse would have four years of coverage remaining.

It is important to know that LTCI is relatively new and that it is still evolving. Insurance companies do not yet have reliable data upon which to base premiums. You also need to be concerned with the financial health and stability of the company providing coverage. Accordingly, you should expect to see changes in both the premiums you pay and the coverage you receive in the years ahead.

Whether you self-insure or purchase LTCI, planning for long-term care expenses in retirement is essential. Taking the right steps so that you are prepared for the unexpected will not only give you peace of mind knowing that your financial future is secure, but will also give you the confidence of knowing that you will have the care of your choice, while ensuring your long-term care will not be a burden to your family and heirs.