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When working with new clients, I help them daydream about their golden years. Most picture a retirement filled with leisure, travel and time spent with loved ones. However, there's an important aspect of later life that I ask them to explore since many people overlook it until it's too late: possibly needing long-term care.
Long-term care encompasses a range of services designed to meet a person's health or personal care needs over an extended period. These services can include assistance with daily activities like bathing, dressing, eating, toileting and getting around and include homemaker services, adult day care, assisted living and skilled nursing.
The reality is that as we age, the likelihood of needing long-term care increases significantly. According to recent studies, about 70% of people who live past 65 will require some form of long-term care services in their lifetime. This statistic is particularly relevant for women, who tend to live longer than men and are more likely to need care for a longer duration. The financial impact of long-term care can be substantial.
In the United States, the Alzheimer's Association estimates that 6.7 million people have Alzheimer's disease. This number includes people of all ages, but the majority are over 65. The percentage of people with Alzheimer's increases with age, from 5% for people aged 65–74 to 33.3% for people aged 85 and older.
According to Genworth's annual cost of care survey for 2023, the U.S. national average cost for long-term care services ranged from $5,720 a month for homemaker services to a whopping $9,733 a month for a private room in a nursing room. In many states, these costs were much higher. For many families, these expenses can quickly deplete the savings and assets that took them years to accumulate.
Planning for long-term care is not just about protecting your financial future; it's about ensuring you have choices and maintaining your dignity as you age. Early planning allows you to make decisions about your care preferences while you're still healthy and able to do so. It also provides an opportunity to explore various funding options and potentially qualify for more favorable insurance rates.
Beyond the finances of care, having a plan in place can alleviate the emotional and financial burden on your loved ones, who might otherwise be forced to make difficult decisions on your behalf during a healthcare crisis. By addressing long-term care planning now, you're taking a proactive step towards securing your financial independence and peace of mind.
As we delve deeper into the specifics of long-term care financing, remember that the goal is to create a flexible plan that aligns with your values and ensures you can receive the care you need, when you need it— without compromising your financial security or burdening your family.
Traditional Payment Options and Government Programs
When it comes to financing long-term care, many people find themselves in a bit of a pickle and overwhelmed by how to pay for long-term care when it's needed. Let's break it down:
Using Personal Savings or Assets
One straightforward approach is dipping into personal savings or assets to cover the costs. It sounds flexible, but the high expenses of long-term care can drain your savings very quickly, especially with a long-term condition like Alzheimer's.
Medicare Doesn't Help
Many people assume they can simply use their Medicare coverage to help pay for care. This federal health insurance program is a lifesaver for many seniors, but when it comes to long-term care, it's a bit misunderstood. Medicare usually only covers short-term skilled nursing care or home health care after a hospital stay. For long-term care, though, you're mostly on your own.
Navigating Medicaid
Enter Medicaid, which many assume will come to their rescue should they ever need it. The problem is, qualifying for Medicaid isn't a walk in the park. You'll need to meet strict income and asset criteria, which might mean parting ways with some of your belongings. Plus, each state has its own rules, making it all the more confusing.
For example in 2024 in Colorado, it’s only available to individuals with less than $27,186 in income and $2,000 in assets. For married couples, the healthy spouse can only retain $154,140 in assets and their pension and Social Security income. There's also a five-year lookback period, meaning Medicaid checks to make sure you didn't move assets to a trust or give it away to loved ones before applying.
Other Government Options
The Department of Veterans Affairs may be able to lend a helping hand to eligible veterans and their spouses. Some states have programs to chip in for long-term care costs, like partnership initiatives that let you protect certain assets while still qualifying for Medicaid.
There's also the Program of All-Inclusive Care for the Elderly (PACE), which provides medical and social services for elderly folks who prefer staying in their communities instead of a nursing home.
Long-Term Care Insurance and Alternatives
Long-term care insurance is a type of coverage designed to help pay for extended care services that aren't typically covered by health insurance or Medicare.
Traditional Long-Term Insurance
Traditional long-term care policies work by reimbursing policyholders a daily and/or monthly amount, up to a maximum amount, for services to assist them with their activities of daily living.
These policies can provide valuable protection against the high costs of long-term care, potentially preserving your savings and assets for other purposes or for your heirs. However, they come with drawbacks, including potentially high premiums that may increase over time, and the risk of paying for coverage you might never use.
Hybrid Life and Long-Term Care Insurance
In recent years, hybrid life and long-term care policies have gained popularity as an alternative to traditional long-term care insurance. These policies combine life insurance with long-term care coverage, offering more flexibility and potentially better value for some individuals.
If you don't end up needing long-term care, your beneficiaries receive a death benefit. While these policies can be more expensive upfront, they provide a guaranteed return on your investment, either through long-term care benefits or a death benefit, addressing a common concern with traditional policies.
Cash and Savings
For those who prefer not to purchase insurance, self-insuring by using savings and investments to pay for care is another option. You could set aside a significant amount of money specifically for future long-term care needs.
While it offers complete control over your funds and flexibility in how they're used, it requires a lot of discipline and financial resources. The risk with self-insuring is that you might underestimate the amount needed or face a need for care earlier than you expected, potentially depleting your savings more quickly than anticipated.
When weighing these options, consider factors such as your health history, family longevity, financial situation, and risk tolerance. Long-term care insurance, whether traditional or hybrid, can provide peace of mind and protect your assets, but it comes at a cost.
Self-insuring offers more control but requires careful planning and potentially sacrificing other financial goals. Ultimately, the best choice depends on your individual circumstances and priorities. By carefully evaluating each option and seeking professional advice, you can make an informed decision that aligns with your long-term financial and care goals.
Leveraging Personal Assets and Retirement Planning
Home Equity
When it comes to funding long-term care, leveraging personal assets can be a powerful strategy, especially for those who have built up significant equity in their homes. Home equity lines of credit (HELOCs) and home equity conversion mortgages (HECM), more commonly referred to as reverse mortgages, are two options that allow homeowners to tap into their property's value.
A HELOC provides a flexible line of credit that can be drawn upon as needed, potentially offering a lower interest rate than other forms of borrowing. This option can make sense for a possibly shorter-term medical situation where you need long-term care for a while but expect to recover, such as a hip surgery.
Reverse mortgages, designed specifically for homeowners aged 62 and older, allow you to convert part of your home equity into cash without having to sell your home or make monthly mortgage payments. When you pass on or sell the home, the mortgage balance with interest is paid from the proceeds.
While these options can provide substantial funds for long-term care, it's crucial to carefully consider the terms and potential impact on your estate before proceeding.
Incorporating Long-Term Care Expenses in Your Retirement Plan
This involves not only setting aside funds specifically for potential care needs but also considering how these expenses might affect your other retirement goals. One approach is to create a tiered savings plan, where you allocate funds to different purposes based on their priority.
For example, you might have a base tier covering your essential living expenses, a second tier for discretionary spending and travel, and a third tier dedicated to potential long-term care costs. This method allows you to balance your desire for an enjoyable retirement with the need for financial security in case of health challenges.
Don't Put Off Planning for Your Long-Term Care Needs
Maximizing your available resources is key to making sure you are prepared to fund long-term care. This might involve a combination of strategies, such as purchasing a smaller long-term care insurance policy to cover a portion of potential costs while self-insuring for the rest through savings or home equity. Another approach is to consider relocating to a more affordable area or downsizing your home, which can free up equity and reduce ongoing expenses.
Beyond that, exploring community-based services and adult day care programs can help stretch your resources by providing necessary care at a lower cost than full-time in-home or facility-based care.
By carefully evaluating your assets, understanding your options, and planning proactively, you can create a robust strategy that protects your financial independence while ensuring you receive the care you need in your later years.
For more tips like these, download my free ebook series that covers debt management, growing your income to save more, investing wisely and retirement planning. To learn what it's like to work with a financial advisor, you can book a free call with Life Story Financial.
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