How much can you afford to spend per year during retirement? $35,000? $50,000? $100,000? Unless you’re rich, the cost of long-term care could overwhelm your budget and deplete your retirement savings well before you die, leaving you with limited choices—via Medicaid—for your care.
The annual costs for long-term care start at about $18,000 for adult day healthcare—an option if a relative can care for you outside work hours. Costs then shoot up to about $45,000 for assisted living or home healthcare. The expense nearly doubles for nursing-home care, depending on whether you go for a semi-private room ($85,775) or a private room ($97,455). These figures are 2017 national medians; costs can be considerably higher or lower depending on where you receive care. But no matter what, these prices underscore the need to plan for long-term care so you don’t go broke after you’ve stopped working.
Assuming you can’t afford to self-insure for long-term care, here are your three options for paying for care and how they’ll affect your retirement funds.
Option 1: Long-Term Care Insurance
Many older adults don’t purchase long-term care (LTC) insurance because it’s difficult to understand, it can be pricey and they don’t like the idea of paying for something they think they’ll never use. But if you can afford it, it’s your best defense against the high price of long-term care. It provides a daily benefit, perhaps $150 or $200 per day, and a lifetime benefit, perhaps two years or three years. According to the American Association for Long-Term Care Insurance 2016 price index, which includes “good,” “better” and “best” coverage options, yearly premiums range from $960 to $2,535 for a single person, age 55, and from $1,920 to $3,560 for a couple age 60. The older you are when you take out a policy, the higher the premium will be.
You can customize your daily and lifetime benefits based on what you expect you’ll need and your budget. For example, someone with a family history of Alzheimer’s who can afford a large policy would want to purchase a higher daily benefit and longer lifetime benefit than someone with a healthy family history and a tight budget.
Long-term care helps pay for assistance with activities of daily living such as bathing, eating, getting dressed—and, yes, using the toilet—when you’re unable to do so on your own because of mental or physical disability. Your policy remains in force as long as you pay the premiums, until you exhaust your lifetime benefits or until you die. Your insurer can’t cancel it if you file a claim or become sick or disabled.
While the premiums will diminish your retirement funds, they will more than make up for themselves if you need to file a claim.
Option 2: Rely on Family
“Daughter care” (or, less frequently, “son care”) might seem like the best option for your long-term care. Relying on a child to help you is free, they can help you in your home or theirs and you’re probably more comfortable around them than you are with strange nurses. But it’s not a good idea, even though it’s the one 75 percent of Americans are relying on.
If you end up with dementia or Alzheimer’s, you’ll eventually need round-the-clock care, placing a huge emotional, physical and financial burden on your child. They will have to leave the workforce—or go from full-time to part-time—straining their current finances and making it impossible to save for their own retirement, get an employer’s 401(k) match, or accrue Social Security credits and higher future benefits. They may lose other employer benefits, such as health insurance and life insurance. If they’re still working, being part-time might kill their chances of earning a promotion. They could end up sacrificing their own retirement because you didn’t prepare properly for yours.
Some adult children are especially burdened because they end up caring for their parents at the same time as caring for their children and their in-laws. What’s more, the burden your care places on them could damage your relationship at a time when you need their emotional support more than ever.
Relying on family may not deplete your own retirement funds (though your share of the associated medical bills will still take their toll). But it could very well prevent the next generation from accumulating enough retirement funds of their own. And that’s probably not what you want for your loved ones.
Option 3: Rely on Government Assistance
As a last resort, you can rely on Medicaid for your long-term care needs. Here’s what this program provides and what its limitations are.
You can’t access Medicaid benefits unless you have a bare minimum of assets (perhaps $2,000, depending on your state of residence) and a limited monthly income ($2,199 in Florida, for example, for a 65-year-old). However, there is a way to preserve at least some of a person’s wealth and still qualify for Medicaid through use of a trust.
When you do have to rely on Medicaid, you’re limited to facilities that accept Medicaid, and then, you may be further limited by the number of beds those facilities have for Medicaid patients. In addition, Medicaid facilities may be of lower quality than private facilities since state funding may be inferior to what private patients and their long-term care policies pay.
Each state’s Medicaid program is different, and each long-term care policy is different, but broadly speaking, both cover nursing home stays. Medicaid may cover in-home care or assisted living, depending on your state. As a Medicaid patient, you could be forced to change facilities against your will—for example, if the facility decides to stop accepting Medicaid patients. Basically, relying on Medicaid puts you at risk of having little choice of what facility you enter, and you’re unlikely to have a private room. Few of us would consider such circumstances ideal, especially when we’re trying to recover from a disabling injury or illness.
The advantages of Medicaid over LTC insurance are that it covers the cost of your care from day 1, while LTC has a waiting period called an elimination period during which you must pay your own way. Also, Medicaid benefits for nursing-home care don’t have a lifetime maximum, unlike LTC insurance.
All this “free” care from Medicaid is hardly free, though. First, you have to be nearly broke to qualify. Then, if you own a home, your state can use proceeds from the sale of your home after your death to cover your Medicaid bills.
What about Medicare? Its nursing-home benefits are short-term and require you to meet certain conditions. The best-case scenario, if you meet qualifying conditions, is that Medicare will pay 100 percent of your costs for the first 20 days and costs exceeding $140 for days 21 through 100. That’s all the coverage you can get.
The Bottom Line
To prevent long-term care from depleting your retirement funds and to avoid relying on relatives or the government for help, LTC insurance is the way to go. Long-term care insurance isn’t cheap, but you can tailor a plan to fit your budget so that you at least have some coverage. If you ever need to use that coverage—and there’s a good chance you will—it will give you more control over where you receive care and how much of your own money you have to spend.