As individuals progress through retirement, the possibility of needing long-term care becomes an important consideration. Long-term care refers to assistance and support required by individuals with chronic illnesses, disabilities, or cognitive impairments that hinder their ability to perform daily activities independently. In most cases, the care becomes necessary as individuals age and is provided through home care, assisted living facilities, or nursing homes.
The costs of long-term care are substantial and a common fear for many individuals is spending a substantial portion of their wealth on care in the event that they need assistance in the future.
While there aren’t many easy answers when it comes to planning for long-term care, the sooner individuals begin thinking about the possibilities of care and the available options, the better off they and their families are likely to be.
Costs of Long-Term Care:
The costs of long-term care have continued to grow significantly over the past two decades. One of the main drivers of increasing cost is the baby boomer generation which is beginning to reach the life stage where long-term care is needed.
The baby boomer generation represents approximately 73 million people with 10,000 turning age 65 every day from now until 2030, and it is estimated that about 7 out of 10 of these individuals will require some type of long-term care during their lifetime. Accordingly, the demand for long-term care services is growing and will be substantial for decades to come.
The increased demand on the long-term care system has been further aggravated by the challenges of COVID-19 and the strain it put on health care facilities. Combine these factors with the rising wage environment of the past two years, and long-term care costs continue to grow.
For perspective, Genworth Financial performed a recent (2021) Cost of Care study where they researched the cost of long-term care throughout the United States. While the cost of care can vary substantially depending on location (i.e. state to state; rural vs metropolitan areas, etc.) and level of required care, the common denominator is that the cost of care is substantial.
The following table shows the median cost of care from Genworth’s study for the United States, Minnesota, and North Dakota.
With the cost of care reaching $12,000-$13,000 per month in a nursing home facility, an individual who needs care for a significant period of time can find themselves burning through their lifelong savings quickly.
Key Takeaway:
The cost of long-term care can be a major expense for those who need care for multiple years.
Typical Length of Care and Total Cost:
The length of stay and the total cost of long-term care depends on several factors, including the individual’s health condition, the level of care needed, and the availability of family support. Longtermcare.gov reports the following statistics regarding long-term care:
- Someone turning age 65 today has almost a 70% chance of needing some type of long-term care services and support in their remaining years
- Women need care longer (3.7 years) than men (2.2 years)
- One-third of today’s 65-year-olds may never need long-term care support, but 20 percent will need it for longer than 5 years
The following chart shows the types of long-term care that individuals typically need as well as the average length of time the care is needed.
Source: https://acl.gov/ltc/basic-needs/how-much-care-will-you-need
While a majority of individuals will eventually utilize some form of long-term care, many individuals may be able to avoid costly care for many years if they have a spouse or family members that can provide care at home initially.
Eventually, however, the needs of the individual may become more than family members are able to meet, and professional care becomes necessary. As the averages in the table above show, most individuals do not need long-term care for more than a few years, and care in nursing homes typically does not extend more than a year or two.
Nevertheless, any one individual’s experience doesn’t always match the averages. The primary risk to most families is a prolonged stay in a nursing home since the cost of nursing home care can be 2-3x higher than the cost of home care or assisted living facilities.
While uncommon, long nursing home stays can occur, and when they do, the financial impact is significant. Imagine an individual who needs skilled nursing care in a nursing home for 5 years. At $150,000 per year, the total cost would be $750,000.
Key Takeaway:
While most individuals who require care in an assisted living facility or nursing home only require significant care for a year or two, some individuals will require care for long periods of time.
Preparing for Long-Term Care Costs:
When considering how to prepare for long-term care costs, the first place to start is by considering an individual’s general health and family history. Individuals from families with a history of dementia and Alzheimer’s disease are likely more concerned about long stays in long-term care facilities than others who don’t have a similar family history.
Next it is important to consider the individual’s financial situation and their ability to handle the cost of care. Typically, individuals can be grouped into one of the following three categories when considering their ability to pay for long-term care.
Minimal Assets: Individuals with limited financial resources do not have assets that need to be protected and likely have little need for long-term care insurance. If they need long-term care in the future, they will spend down their minimal assets and will apply for Medicaid coverage which provides assistance for those with low income and limited assets.
Significant Assets: Individuals with substantial financial resources often have sufficient assets that they can self-insure. Each individual will have a slightly different threshold for the level of risk they are comfortable taking, but an individual who has $5,000,000 in assets can typically handle a $750,000 5-year stay in a nursing home facility in the unlikely event that it should occur. That decision becomes more difficult if an individual’s assets are closer to $3,000,000 or $2,000,000.
Average Assets: This is the category where many individuals fall, and it is the most difficult category for decision making. These individuals often have $500,000 – $2,000,000 in assets which means a 5+ year stay in a nursing home could wipe out or take a significant bite out of their life savings. At the same time, the cost of long-term care insurance is likely a significant burden as well.
Key Takeaway:
Individuals who have average to moderate assets have the most to consider when preparing for future long-term care costs.
Options for Covering Care:
Relying on Medicaid: Medicaid is an option for those with minimal assets, as it covers long-term care costs for eligible individuals. However, qualifying for Medicaid often requires spending down assets to meet eligibility requirements. For that reason, Medicaid is typically a last resort for individuals who either have no assets or no other options.
Self-Insuring: Self-insuring involves using personal funds to cover long-term care expenses. This option is feasible for individuals with significant assets or those who have planned and saved diligently for retirement.
As discussed in our previous blog post titled Triple Tax Savings with Health Savings Accounts, HSAs provide an extremely tax efficient way to save for future medical costs. Qualified medical costs eligible for HSA reimbursement include the following as defined in IRS Publication 502:
“You can include in medical expenses the cost of medical care in a nursing home, home for the aged, or similar institution, for yourself, your spouse, or your dependents. This includes the cost of meals and lodging in the home if a principal reason for being there is to get medical care.
Don’t include the cost of meals and lodging if the reason for being in the home is personal. You can, however, include in medical expenses the part of the cost that is for medical or nursing care.”
Accordingly, a significant portion of long-term care expenses can be reimbursed from an individual’s HSA account which provides the ability to cover a substantial portion of these costs using pre-tax funds and ultimately reduce the after-tax cost of long-term care to their families.
Purchasing Long-Term Care Insurance: Finally, individuals can consider purchasing long-term care insurance. Long-term care insurance will typically provide a daily benefit which can be used toward long-term care for a specified number of years (e.g. $250 per day for 5 years).
In the past, certain long-term care policies provided benefits for life; however current policies are typically capped at 3 to 5 years of benefits. While these policies don’t fully offset the risk of spending 10 years in long-term care, they do significantly reduce the cost of the initial years, and likely cover most of the costs for individuals who only experience the average length of stay.
The biggest challenge with long-term care insurance is the cost. Most individuals begin shopping for long-term care insurance between age 60-65, and while premiums vary based on age, health, selected benefits, etc., it is common for long-term care insurance premiums for a married couple to range from $5,000-15,000 on an annual basis.
Given long-term care insurance is typically purchased 10-20 years before the care is needed, paying significant premiums for a decade or two can add up which makes the decision to purchase long-term care insurance one that individuals need to consider carefully.
Purchasing a Long-Term Care Rider on Life Insurance: Individuals can also consider purchasing a long-term care rider on a permanent life insurance policy. While premiums are still significant, this option reduces the risk of paying premiums for decades without receiving any benefit in return.
With a long-term care rider, an individual can access a portion of the life insurance death benefit during life to cover the cost of long-term care.
At the end of life, the life insurance death benefit is adjusted for long-term care received; however if no care is received, the full death benefit is paid out.
Medicaid Planning: A final option that some individuals consider is Medicaid planning. In a Medicaid planning scenario, individuals strategically give their assets away in order to qualify for Medicaid. With Medicaid planning there are very specific rules that must be followed which are beyond the scope of this blog post. Individuals interested in pursuing Medicaid planning should enlist the assistance of a skilled Medicaid planning attorney.
In the end, individuals with average assets have a difficult decision to make. That decision can be influenced by the income sources that they have aside from their investment portfolio as well as how important it is that assets are left over after their lifetime for a surviving spouse or future generations.
Often, individuals in this category will find it worth their time to review available long-term care insurance policies to see whether there is an affordable option they are interested in. These individuals often choose to strike a balance between moderate insurance coverage and personal savings.
Key Takeaway:
For many individuals with assets, preparing for long-term care costs will include relying on amounts they have saved with some choosing to add long-term care insurance if they are not comfortable covering all the costs on their own.
Conclusion:
Planning for long-term care is essential for all individuals, regardless of age or financial status. Understanding the costs associated with different levels of care, potential lengths of stay, and the available options for covering these expenses can help individuals make informed decisions to secure their future, protect their financial stability, and maintain their peace of mind.
Whether it’s through government assistance, insurance, or personal savings, preparing for the costs of long-term care is a vital step to ensuring a comfortable and worry-free retirement.
If you are interested in connecting with one of our Family CFOs to learn more about the costs of long-term care and ensuring you have a sound retirement plan that can handle the uncertainties of the future, we would love to connect to see if what we do is right for you.
