Long-term care in retirement
By Adam Baley
One-third of all lifetime medical expenses are likely to occur within the last few years of life, and most of those costs are the result of long-term care. While there is no risk-free way to pay for medical costs in retirement, investors need to be aware of such potential out-of-pocket expenses and their options for covering them. They need to have a plan in place.
A key concern is for your spouse – trying to make sure that long-term care expenses do not deplete your assets and leave nothing for your survivor.
There are three choices of how to pay long-term care costs in retirement:
- From your savings
- Medicaid – the government program that assists only after you deplete your family’s savings
Long-term care insurance makes sense for some people – but not everyone. It depends on your personal situation.
Do not mistakenly assume that Medicare – the government insurance program for Americans over 65 or with disabilities – will cover long-term medical expenses.
Medicare covers only up to 100 days of long-term care – but only if you have been in a hospital for three consecutive days prior to needing long-term care services.
Even then, Medicare covers only the first 20 days in full; the remaining 80 days can require a daily co-payment. Then, starting on day 101, you are on your own.
Many investors are able to afford at least part of the cost associated with long-term care. The key in buying long-term care insurance is to analyze the gap between the cost of care and your ability to absorb part of the expenses through your cash flows.
Candidates for long-term care insurance
As a rule of thumb, investigate long-term care insurance if you have between $500,000 and $5 million in assets.
With assets lower than $500,000, families have relatively little to insure, given the cost of premiums. Generally, families with more than $5 million likely can afford to self-pay the costs of care because their combined resources could support medical expenses without significant risk of drawing down their assets.
In many cases, investors do not need full nursing home coverage because they are able to pay part of that cost from their income streams. If you need $300 a day for a nursing home and you can afford $150 out of your portfolio, cover the gap. Do not buy too much coverage.
Long-term care insurance typically pays benefits once the policy holder needs help with at least two activities of daily living, including bathing, dressing, eating and using the bathroom. Most policies cover nursing home expenses, as well as adult day care, assisted living and home health aides.
2015 Costs of Care Facts – Wisconsin
- Adult Day Health Care: $16,900
- Home Health Aid: $50,336
- Assisted Living Facility: $47,760
- Semi-Private Room in a Nursing Facility: $90,064
- Private Room in a Nursing Facility: $99,499
Nursing care costs
The cost of skilled nursing care can be expensive and varies drastically with geography. The national average for a private room in a nursing home is $91,250 per year, according to a 2015 industry survey. That same room would cost $99,499 in Wisconsin.
Knowing what it costs in your state can help you to anticipate what to expect to pay out-of-pocket or help you decide if this is something you should insure against.
Insurance costs vary
How much you pay for long-term care insurance depends on your age, health, gender and the benefits you want to receive. A survey of major providers offers some examples.
A healthy 55-year-old man currently would expect to pay about $1,600 per year in premiums for coverage that includes an inflation-adjusting $150 per day for three years, totaling $164,250 in benefits. Because women tend to live longer and use more benefits, their policies usually cost more. An identical policy for a healthy 55-year-old woman would cost about $2,400 per year, or 50% more.
Also, the older you are when you apply for a policy, the more you pay. If that healthy male were 65, not 55, he could expect the annual premium to be $2,500. Most insurance companies won’t initiate a new policy if you are over the age of 75.
Once you buy a policy, expect your premiums to rise at some point. Insurance companies cannot single you out for a premium increase, but they can increase rates on a broad group of people, such as all policy holders over the age of 70.
Married couples ought to plan for the possibility of at least one partner – if not both – needing long-term care and how that might impact their combined resources. Couples need to make sure their plans do not leave a surviving spouse vulnerable.
For some retirees and their families, long-term care can be a costly drain on resources. Have an early, open and honest discussion about expectations and approaches that are right for you and your family. Understand the potential costs involved and what options you have for covering the possibilities of long-term care in retirement.
Considering how the possible costs of long-term care might affect your family’s assets is an important part of retirement planning.
Adam Baley is a registered representative and investment advisor at Landaas & Company.
Please click here to connect to the National Clearinghouse for Long Term Care Information, developed by the U.S. Department of Health and Human Services.
Prolonged care’s cost to retirement, a Money Talk Video by Adam Baley
(initially posted May 26, 2015)