The possibility of needing long-term care is a major factor in your retirement. It’s difficult to think about a time when you may need extra assistance with daily tasks, but it’s common and can be very costly. Worse still, the costs associated with the first 100 days of a long-term care event are covered by Medicare! You may not have a long-term care event, but data from the US Dept. of Health and Human Services suggests there’s about a 70% chance that you will.^[1] Incorporating the possibility of a long-term care event into your post-retirement plan is as necessary as it is prudent.

Strategies to Consider When Preparing for Long-Term Care?

There are four primary methods to handling the financial aspects a long-term care event:

1. Self-insure
2. Purchase an insurance policy
3. Rely on family
4. Rely on Medicaid

You may be able to self-insure and pay the additional costs borne from a long-term care event out of pocket. This requires a healthy balance sheet and may not be an option for everyone. Care often starts in an assisted living facility before graduating to a skilled nursing facility. The median stay in an assisted living facility is about 22 months,^[3] while the average stay in a nursing home is a little under three years.^[4]

Nursing home stays are a little more difficult to estimate. While three years is the average, about half of those who enter stay for about a year. A quarter of those that enter stay between one and five years while the last quarter stay in the nursing home for five years or more. With what can sometimes be a six-figure annual cost, long-term care expenses can add up quickly. Plan carefully if you intend to self-insure. Shortfalls can impoverish spouses and burden family members.

A Fully Insured Solution

Alternatively, you may also purchase a long-term care insurance policy. These policies trigger and pay benefits when there is a cognitive issue or when you are unable to perform two of the five activities of daily living, defined as eating, dressing, bathing, transferring, or toileting. These policies may be the difference in making or breaking your retirement late in life, but they have their own sets of problems.

Premiums on these policies are not guaranteed, which means that an insurer can change them. There is a long and well documented history of insurance companies raising rates significantly on these policies as the years drag on. Since insurance is regulated at the state level, the insurance commission of each state is required to approve the premium increases requested by carriers. In Maryland, Genworth requested premium raises north of 100% on multiple policies just this year. That gets to the heart of the issue: affordability.

There is an adage among financial advisors that if you can afford long-term care insurance you probably don’t need it, and if you can’t you do! Many policies are simply out of reach for the average retiree. A partially insured solution may be all that’s affordable, which means that help may have to come from another source.

Family and Medicaid

Family can step in to help as well. This may not have a financial price tag for you as the person receiving care, but dignity issues, pride, and family dynamics are likely to shift dramatically. Moreover, the person who provides the care is likely to pay a financial price themselves. It may not be possible for them to hold down a job while providing your full-time care.

If they can’t survive financially while providing care, and you don’t have the financial bandwidth to help them either, then your last and final option may be the payor of last resort, Medicaid. This is a state-run healthcare program for the indigent. It is not the same as Medicare, which is a Federal-run program providing healthcare coverage to all Americans over age 65. The rules surrounding Medicaid qualification vary by state and can be complex. There are ways to plan in advance to qualify for Medicaid while still maintaining your assets and income streams, but these are also complex and come with an element of moral hazard.

If family member help and Medicaid don’t align with your vision of retirement, then careful planning well in advance of a long-term care event should be done.

Strategies to Consider When Preparing for Long-Term Care?

A viable strategy is to incorporate the likelihood of needing long-term care into your retirement financial planning. As you formulate your post-work life plan, consider how the prospect of a future long-term care may affect your lifestyle, your family, and your finances. Stress-test the cash flow modeling you complete for your golden years to ensure you have sufficient assets to pay for a long-term care event. If you can’t survive it, get with your financial planner to determine what changes must be made to handle this risk.

It’s not a silver bullet, but one alternative you might want to contemplate is making contributions to a Health Savings Account (or HSA). The advantage of an HSA is that it enables the accumulation of non-taxable funds, provided they are spent on health-related costs.^[2] An HSA comes with its own set of regulations and requirements and, depending on your unique circumstances, may not be accessible. However, if feasible for you, it’s certainly worth exploring the prospect of setting up one of these accounts.

There’s a multitude of potential choices and factors when it comes to devising your retirement strategy. Retirement planning is not a uniform process – it varies from person to person. Contact us if you want help determining how just how a long-term care event may impact you, and what changes you should make (if any) to prepare for it financially.