Many people put off creating a long-term-care plan, yet half of people turning age 65 will require some type of long-term care in their lifetimes. On average women will need 2.5 years of care, while men will need an average of 1.5 years. The cost of nursing-home care in a private room has passed the $100,000/year mark, and in major urban areas, the cost of care can run much higher.
Bob Michaels is extremely passionate about providing the best possible legal experience for his clients, and focuses his practice on elder law and estate planning. Bob specializes in helping folks build a long-term care plan based on their particular circumstance.
Despite these daunting figures, or maybe because of them, many people delay installing a long-term-care plan. In a 2013 survey from The Associated Press-NORC Center for Public Affairs Research, 65% of respondents aged 40 or older, said they had done little to no planning for their own long-term-care needs.
A possible reason for this is that many people are confused about the extent to which the government provides for long-term care. In a consumer survey conducted by Genworth, two thirds of respondents said that they expect government programs to cover all or part of their long-term-care costs. Medicaid is the largest payer of long-term-care costs in the United States, but it imposes strict income limits on individuals who rely on it, and while Medicare may also provide a form of rehabilitation following a qualifying hospital stay, it too imposes significant strictures around eligibility and coverage.
Even those who expect to rely on government resources if they develop a long-term-care needs should consider the financial implications of long-term care for their retirement plans. And those who expect to rely on their own resources or purchase some type of insurance to cover long-term-care expenses, should begin thinking weighing their options as early as 50, or younger.
Here are some ways to factor long-term care into your retirement plan:
Gauge the likelihood of needing care.
The first step is to understand how likely you are to need long-term care. The fact that half of us will need some type of long-term care in our lifetimes and half won't suggests that we should at least plan for the possibility. For example, if you knew there was a roughly 50/50 chance that you'd get into a car accident within the next year, would you go without auto insurance? This doesn’t mean you need to purchase long-term care insurance, but you should consider all your options and financial means.
Understand the costs.
The median annual rate for a private room in a nursing home was just over $100,000 in 2019, but there can be variations in the cost of care based on geographic location; Genworth's annual Cost of Care survey enables you to focus on specific communities. The data will vary for duration of care, but most of the statistics converge in the 2.0- to 2.5-year range.
Assuming that you will need a $250,000 long-term-care fund if you're going to pay for long-term care on your own (or $500,000 if you're part of a married couple), determine how you will be able to access these funds and the quality of care you’d desire.
Hiring in-home care can be cheaper than receiving care in a facility. However, it's important to remember that other household expenses, such as housing and food-related costs, would continue with in-home care, but would be included in the cost of care received in a facility.
If you're part of a married couple, bear in mind that it's not at all uncommon for one spouse to need long-term care while the other remains healthy. In such situations, the couple's financial resources will need to cover the costs of maintaining the household for the healthy spouse while simultaneously paying for long-term care.
You will also need to factor in inflation. Median nursing-home costs (private room) have increased at about a 2% rate over the past year, but over long periods the inflation rate for nursing care has been higher.
Assess available resources.
Armed with a reasonable estimate of how much long-term care might cost, you can determine if your assets are sufficient to cover your ongoing living expenses, based on a reasonable withdrawal rate strategy, plus the additional long-term-care costs.
If you feel confident you have the resources available to you regardless of the costs of long-term care, you probably have enough to self-fund long-term care, but if your plan is tight, purchasing some type of insurance, may be the right way to go.
Create a long-term-care fund.
If you determined that self-funding long-term care is the right way to go, the next step is to build those savings into your retirement plan. Simply incorporate that additional need into your retirement-accumulation goal, and recalibrate your savings target accordingly. Automating your contributions by using an automatic investment plan at your mutual fund firm or brokerage company is an excellent way to go about it.
Keep in mind, however, as you prep for and enter retirement, it will be essential to separate any assets earmarked for long-term-care needs from your spendable assets. Think of creating a distinct long-term-care "bucket," segregating those assets from your other retirement assets. Think of it as a multipurpose fund you can use to cover long-term-care needs, defray your living expenses if you live well beyond your anticipated life expectancy, or pass on to your heirs.
Where to keep the fund.
Where to hold the assets for long-term care is another consideration, such as traditional IRAs, Roth IRAs, or health savings accounts. Keep in mind that the HSA may offer unparalleled tax treatment for qualified healthcare expenses, including long-term care, but you won’t be able to deduct those expenses on your tax return.
Also, the older you are, the more conservatively positioned your long-term-care fund should be. The long-term-care funds of younger savers, can and should be more long-term-oriented and stock-heavy, because overcoming long-term-care expense inflation is a key part of the challenge.
Long-term care insurance.
If you've decided to purchase insurance coverage for long-term care, there are two main options for doing so: stand-alone long-term-care insurance policies and "hybrid" life/long-term-care or annuity/long-term-care products.
The stand-alone policies are straightforward, but premiums can spike, forcing policyholders to choose between higher outlays or reduced benefits. There are also caveats based on age and disqualifying health conditions.
If you don't like the idea of paying premiums for a stand-alone long-term-care policy that you may never need, or you can't purchase such a policy because you have a disqualifying health condition, you can investigate hybrid life/long-term-care or hybrid annuity/long-term-care policies. Not only do they have an attractive "multitasking" quality, but health screening is often less stringent. Hybrid policies are often purchased with a lump sum, which means that policyholders won't face the same premium increases that traditional long-term-care insurance policyholders have had to face. If you do decide to purchase a hybrid policy, one good option is to exchange a life insurance policy that you no longer need for the hybrid policy.
In general, both options have pros and cons, so do your research. If government-funded care is part of the solution, think through the ramifications. If you've determined that you don't have the resources to cover long-term care, either by paying for it outright or by purchasing long-term-care insurance, government resources may be the only option. However, it’s important to understand how to qualify for it, which is particularly important if you're part of a married couple.
AARP has created a helpful Long-Term Care planning checklist you may find helpful. It can downloaded HERE.
For more information, if you have additional questions or concerns about long-term care planning, contact experienced estate planning attorney Bob Michaels to schedule an appointment.