When building a financial plan for retirement, most people understand that they need to anticipate higher healthcare costs, simply because as we age, we require more in the way of preventive care and treatment. But what many fail to take into account is the likelihood of the need for long-term care: non-medical assistance required to maintain quality of life. And since such costs are not covered by Medicare, failing to plan for them can create a serious shortfall in financial resources.
In case you’re new to this discussion, some definitions might be helpful. The term “long-term care” encompasses a range of services and types of support that may be required to meet personal care needs. Rather than being medical in nature, long-term care involves help with activities of daily living (ADLs) such as bathing, dressing, toileting, transferring from bed to chair and vice versa, preparing meals, and eating. Because these are not strictly medical matters, LTC is not usually covered by Medicare, which is the primary federal program intended to assist eligible seniors with medical costs.
According to the US Department of Health and Human Services (HHS), about 60% of Americans will require some form of LTC at some point in their lives, and this is especially true as Baby Boomers and even a few Gen Xers move into retirement. HHS figures indicate that a person turning 65 today has almost a 70 percent chance of needing LTC in their remaining years. Additionally, because women typically live longer than men by about five years, they are more likely to require LTC at some point. In fact, 2023 statistics indicated that 67% of the residents of long-term care facilities (nursing homes) were women.
When people are no longer able to perform two or more of the ADLs without assistance, they become candidates for LTC. It’s also important to remember that many circumstances other than advanced age can bring about a need for LTC, including chronic health conditions such as diabetes or high blood pressure, stroke, severe heart disease, and other illnesses and disabilities that can strike people in their 60s, 50s, or even 40s.
Remember: most LTC expenses are not covered by Medicare. Surveys consistently show that this fact comes as a surprise to many, but unless you require skilled nursing care in a nursing home or in your own home, Medicare won’t help. Further, coverage by Medicare, even for such covered expenses, is limited to a maximum of 100 days (the average length of time covered by Medicare is actually about 22 days).
This means that most LTC services are provided by an unpaid caregiver—usually a friend or family member—a nursing home, a home care aide, an adult daycare service provider, or some combination of the above. Paid services, as you might expect, aren’t cheap; the median cost of a private room is now over $9,500 a month, according to SeniorLiving.org. The median annual cost of a home health aide is over $50,000 a year.
For those with scarce financial resources, Medicaid typically becomes the source of last resort for LTC funding. Medicaid covers most non-medical LTC costs, but to qualify, your income and assets must be below a certain level, which is set by each state (see www.healthcare.gov). An entire legal specialty has sprung up around various strategies for helping older Americans qualify for Medicaid: gifting assets, placing them in certain types of trusts, etc. In laymen’s terms, older people must basically put themselves below the poverty line in order to qualify. Also, because of Medicaid rules, once those assets are gifted away or otherwise divested, they become difficult if not impossible for the grantor to repossess and still retain eligibility for Medicaid benefits. It is a serious dilemma.
This is where long-term care insurance can enter the picture. These plans, usually issued by private insurers, offer many different options—each of which comes with a cost—that can cover most or all of the expense of LTC services. Premiums are based on your age and health when the policy is issued (the younger and healthier you are, the lower the premiums) and which options you select for coverage. Most policies reimburse policyholders a daily amount, up to a pre-selected limit, for expenses related to assistance with ADLs, and most policies will cover expenses for nursing home care, private home care, and adult day care.
For persons with plentiful assets—generally, $1 million or more—pre-funding an LTC plan can be a cost-effective choice. They should consult with their financial advisors in order to establish the best tradeoff between managing the risk of LTC costs and keeping the maximum level of assets actively invested. Younger persons who are still working and approaching retirement can profitably utilize various strategies involving policies with cash value and death benefits to even further lower the opportunity cost of funding their eventual LTC needs. It’s important to keep in mind that the average length of time an individual in the US will need LTC services is about three years. This means that LTC planning should take into account inflation, the average cost and duration of a nursing home stay in your state, and your present age.
On the other hand, persons with higher net worth—especially those whose health is generally good—may prefer to “self-insure” against LTC costs, setting aside funds to cover these potential costs. Such funds may be deposited in a health savings account (HSA), which features non-taxed growth and tax- and penalty-free withdrawals for qualified expenses, including those for long-term care. Your wealth advisor can work with you to determine if this approach could be beneficial for your particular situation.
Some people don’t like the idea of paying long-term care premiums because the money they’re paying for coverage will be lost if they never have to move into a nursing facility or pay for skilled in-home care. But those same people buy home and auto insurance policies to cover catastrophic losses that they hope will never occur. In other words, insurance is there for peace of mind. The real question that people should be asking themselves is: Does it make sense to protect against the biggest potential expense in a retirement plan’s later years?
If paying that kind of premium now would disrupt your retirement savings strategy, you may wish to discuss Medicaid planning with your financial and legal advisors. But the most important thing is that even if you are still in your peak earning years, the time to begin making a plan for your LTC needs is now.
At JFS Wealth Advisors, we want you to go into retirement with the confidence that comes with having in place a solid plan that takes into account all your needs and priorities. To learn more, visit our website to view our recent webinar, “Aging in Place or Move? The Pros and Cons Revealed.”
