When we think of retirement, we think of a time when we can finally rest, pursue hobbies we never had time for before, and spend time with families and friends. What we don’t envision is spending a few of those years cooped up in a nursing home or other long-term care facility. And what we really don’t plan for is how we will pay for those extremely costly years. Unfortunately, long-term care expenses are soaring, taking a bigger and bigger cut out of retirees’ budgets.
Of course, how much your long-term care costs will depend on many factors, such as your health condition, location, and the kind of care you require. No matter what, though – it’s expensive. Some figures from Consumer Affairs showcase precisely what we’re talking about here.
Medical Expenses
- The estimated cost for long-term care during the last five years of life is between $233,000 to $367,000. The average American spends $140,000 on long-term care out-of-pocket. Factors affecting insurance costs include gender, marital status, and the provider.
- Nursing Home Costs: The median annual cost of a nursing home in the U.S. ranges from $85,800 to as high as $150,000 or more per year in some states, translating to monthly expenses of $7,150 to $12,500. One crucial point is that Medicare generally does not pay for long-term medical expenses.
- Assisted Living Costs: The annual cost for an assisted living facility is approximately $51,600, or about $4,300 per month.
- In-home Care Costs: The median cost of in-home care services was about $24 per hour in 2020, with people spending about $4,500 per month (estimating about 44 hours per week per senior). This cost can rise significantly for those who need medical care, such as wound changes or support for IVs. In-home care costs have been increasing due to the lack of skilled workers and rising demand, especially as baby boomers age. Where you live can also significantly affect the price of in-home care. For example, in areas like Louisiana, the median cost is about $17 per hour for care (about $38,900 per year), while in Florida, it’s $22.50 per hour (about $64,000 per year).
Unfortunately, the odds of ending up in such a predicament just aren’t in your favor. According to the Department of Health and Human Services, about 70% of individuals over 65 will require some form of long-term care during their lifetime.
Purchase long-term care insurance
Paying for insurance is psychologically difficult. It’s easy to tell yourself you won’t need it, plus you have other, more pressing financial concerns, such as your child’s tuition and home maintenance. Then, when that insurance would have come in handy, the regret kicks in. Basically, it’s better to have something and not need it than need it and not have it.
Long-term insurance is definitely one of those things we need, whether Traditional or Asset-Based. There is a wide range of long-term care providers and products with all kinds of stipulations, regulations, and benefits. Still, at the end of the day, they’re likely to save you a lot in medical expenses in the long run if you find yourself needing medical care – and, statistically, you’re likely to. Plus, you can possibly deduct your premiums from your taxable income, providing some tax relief.
A married couple without insurance
Let’s imagine a couple, Barbara and Jake. They are both living their retirement dream when, one by one, they start to feel the wear and tear of old age and slowly fall ill. Eventually, Jake needs in-home care for four years straight, followed by a year-long stint in a nursing home. Barbara doesn’t fare much better. She needs five years of in-home care and two years in a nursing home afterward.
Jake’s in-home care of $55,000 would come out to $220,000, while his year-long stint in the nursing home costs him $117,900. Barbara’s costs are even higher, with her in-home costs coming to $275,000 and her nursing home bill equalling $235,000.
Together, the couple would pay $848,700 out-of-pocket for their long-term care needs.
I have a feeling that most retirement plans wouldn’t handle such a blow without careful planning.
A married couple with long-term care insurance
But what if they had purchased long-term care insurance? Let’s rerun the numbers.
Jake and Barbara purchase long-term care insurance. Jake pays a bit less because he has a shorter life expectancy.
Accordingly, Jake pays $150 monthly, and Barbara pays $250 monthly. Over ten years, this amounts to $48,000. The insurance policy provides coverage for three years for each of them.
Eventually, fate catches back up with them.
The insurance covers the first three years of in-home care for Jake, costing $165,000. He pays out-of-pocket for the remaining year of in-home and nursing home care, costing $172,900.
For Barbara, the insurance also covers the first three years of in-home care, costing $165,000. She pays out-of-pocket for the remaining two years of in-home care and the two years of nursing home care, costing $312,800.
So, the couple’s total out-of-pocket cost, including the premiums, is $533,700.
Compared to the $848,700 they would have paid without insurance, they save approximately $315,000 in long-term care expenses, even after accounting for the cost of the premiums. These kinds of savings clearly demonstrate the potential value of long-term care insurance in mitigating the high costs of long-term care, even when the coverage period is limited.
But still, you don’t want to pay over half a million dollars out of your retirement savings, so let’s look at some other tools to help reduce that cost.
Contribute to a Health Savings Account (HSA)
We’ve previously gone into Health Savings Accounts, but here is a quick breakdown in case you missed it. You qualify for an HSA if you participate in a high-deductible health insurance plan. An HSA allows you to contribute to a special savings account whose investments grow tax-free. Any withdrawals spent on qualifying medical expenses are also tax-free. Contributions are also deductible, meaning you get a potential triple tax advantage.
In 2023, you can put $7,750 into your account if you have family coverage. How does that translate into years of growth, assuming you don’t remove any funds for medical expenses?
Let’s assume you invest in an S&P 500 index ETF with a 9% return for 40 years starting. You put an extra $160 into the account each year, assuming that contribution limits will rise.
After 30 years, you have $375,162.58. You then stop putting into the HSA and let it grow for another ten years. You’ll have $888,146.26, easily enough to pay for your medical expenses. What we’re not factoring in is inflation. However, a 9% return is enough to beat out inflation in most years. Still, these figures adequately showcase the power of compounding interest.
Unfortunately, you may not have access to an HSA; if you do, you may have to pull money out periodically for qualifying medical expenses. Another option would be to utilize a Roth to take advantage of long-term compound growth without worrying about mandatory withdrawals once you reach a certain age, known as Required Minimum Distributions.
Purchase an annuity
An annuity is a contract between you and an insurance company in which you pay them either a series of payments or a lump sum of money in exchange for higher payments at a future date. Like investing, but with a greater safety cushion as the insurance company takes some of the risks on its shoulders.
Some annuities come with a ‘rider’ that can provide for long-term care expenses, though you’ll pay a higher fee. Or, you can simply purchase an income annuity that will produce a guaranteed stream of income late on in life. You can use those payments for nursing home costs, and if you don’t need the money, you’ll just have more money for a better lifestyle.
Lifestyle Insurance
This is not real insurance. In fact, it’s more of a great investment with the highest possible rate of return. What I mean here is a way of life designed to keep your overall medical expenses low and reduce the chances of chronic illness later in life. Keep your body healthy and your mind sharp. Go to the gym, go for long walks, read more often, eat cleaner, stop smoking, and reduce your alcohol intake. You’ll not only be happier, but your wallet will thank you!
Plus, the last thing you want is to spend the last years of your life bogged down by aches and pains, or worse yet, stuck in a wheelchair or bed.
Consult a Financial Advisor
With that being said, there is still the chance of ending up needing to pay a bundle in long-term care expenses, even if you’re fit as a fiddle and take care of yourself even into your later years. A financial advisor can put you down the best path to keep the chances of going bankrupt due to medical expenses when you need your money the most.
We’d be happy to review your financial plan and determine the best way to implement long-term care planning into it. Just click the button below!
