AS BABY BOOMERS and Generation X march toward retirement, they face a daunting issue: What steps should they take, given the risk they’ll require long-term care?
Long-term care—defined as needing help with activities of daily living such as bathing, dressing and eating—is something that almost 70% of retirees will require at some point, according to LongTermCare.gov. Problem is, Medicare only provides limited coverage.
Yes, Medicaid does cover long-term care. But it was designed as a last resort for low-income folks. To qualify, your assets must be virtually exhausted. That could leave your spouse living in poverty, plus it eliminates the chance of bequeathing significant sums to your family or favorite cause. And even then, if Medicaid is paying, your care options will likely be limited.
The upshot: Because of the high likelihood of needing care and the limited government assistance available, preparing for possible long-term-care costs should be on the agenda for all of us.
Based on Genworth Financial’s 2019 Cost of Care survey, it costs an average $4,385 per month in the U.S. for a fulltime home health aide and $8,517 per month for a private room in a nursing home. According to a 2016 study by the Department of Health and Human Resources, one out of six retirees will spend at least $100,000 out of pocket for long-term care. In extreme cases, where someone is diagnosed with dementia, 24-hour care could be required for many years. Because of this risk, many people turn to insurance. But before doing that, take five steps:
1. Get a handle on costs. Depending on where you plan to retire, the cost of care can differ sharply. For example, a private room in a nursing home costs $12,745 per month in Seattle, but only $8,669 in Atlanta.
To get a sense for the bill you might face, try Genworth’s Cost of Care calculator. Get the cost of a fulltime home health aide, assisted living facility and private room in a nursing home in your area. For example, in Richmond, Virginia, those costs are $4,576, $4,848, and $9,292 per month, respectively. These benchmarks are a good starting point for planning.
2. Set a coverage goal. While it would be great to have enough to cover a private room in a nursing home for 20 years, that’s not realistic for most people—and, frankly, not necessary, since most people today receive care at home or in an assisted living facility.
As a starting point, consider having enough to cover an assisted living facility for up to three years, which is about the average length of time that people require care. You can then adjust based on your comfort level. For example, based on the Richmond numbers above, this would mean being able to cover $4,848 per month for 36 months, for a total of $174,528. This exclude inflation, which we’ll get to later.
In my case, being the paranoid actuary that I am, I would likely set a higher target—maybe 50% higher. But others might be okay with the average or even target less coverage. There’s no right answer. The most important thing is to set a coverage target that’s comfortable for your risk tolerance and situation.
3. Consider what’s important. Once you’ve set your coverage goal, it’s time to assess your ability to fund it. A simple way to approach this: Organize your retirement resources into two categories—income and assets.
Income includes Social Security, pensions and other monthly income you expect to receive in retirement. How much of this monthly income would you be able to tap if you needed long-term care? It’s a similar exercise when you look at your assets. We’re talking here about retirement accounts, regular taxable accounts, second homes and other assets you own. Ask yourself how much of these assets you’re comfortable setting aside for long-term-care costs.
As part of this exercise, do an honest assessment of your priorities. If it’s important to you to leave an inheritance for your children or you want to keep the vacation home in the family, exclude those assets from the resources available to pay long-term-care costs. If you’re married, be careful about relying on income or assets that are tied to one spouse. For example, if one spouse receives a lifetime pension that you assume will cover some long-term-care costs, what happens if that spouse dies first and the surviving spouse needs care?
4. Determine your coverage gap. Now that you have a clear assessment of your coverage goals and the money available, you’ll have a handle on whether you’re likely to come up short. For example, if your goal is to cover $5,000 per month for three years, and you have a pension and other income that can cover $2,000 per month, then your net need is $3,000 per month for three years, or $108,000.
If you have another $60,000 in assets that you’ve set aside for long-term care, then your coverage gap is about $48,000. One note about inflation: If the resources you set aside for care will generally grow with inflation—let’s say your pension has inflation adjustments or the assets are invested in the stock market—then it should be okay to look at things in today’s dollars. But if not, you’ll want to plan for higher long-term-care costs down the road.
5. Fill the gap. Once you’ve determined your coverage shortfall, the last step is to decide if and how to fill it. In the case of the $48,000 gap above, you might decide that’s a risk you’re comfortable with and do nothing about it. But if you do want to fill the gap, be sure to compare all your options.
For instance, could you live on less, so you allocate more of your assets or income to a long-term-care fund? If you’re still working, could you save a bit more or work a few extra years? Are there any changes you can make to your retirement priorities to free up additional assets? Should you consider a part-time job in retirement?
Like retirement planning in general, it’s important to plan well in advance, so you can take advantage of compounding and so you have a wide array of options still available to you. If you start planning in your 40s and 50s, that’s ideal. But if not, the sooner you begin, the better. One option to consider: insurance. Despite the negative headlines, long-term-care insurance can be affordable, especially for those in good health. In my next article, I’ll discuss how long-term-care insurance works and how to select the right policy for you.
Dennis Ho is a life actuary and chief executive of Saturday Insurance, a digital insurance advisor that helps people shop for life, disability and long-term-care insurance, as well as income annuities. Prior to co-founding Saturday, Dennis spent 20 years in the insurance industry in a variety of actuarial, finance and business roles. His previous articles include Like Old Times, Value for Your Cash and Waiting Game. Dennis can be reached via LinkedIn or at email@example.com.