Most people have a gap in their retirement plans because they have not considered how they will pay for long-term care, if they need it, when they get older. Without a plan to pay these expenses, they are exposed to tremendous financial risk.
What is long-term care? When you need help with your everyday life because you are incapacitated in some way, and the need is likely to persist over the long run, that’s long-term care. Many people have to hire somebody to help them in their own homes, and most people prefer home care. Some have to pay a facility for more intensive care.
This kind of care is custodial care, not medical care. The need is for help with the activities of everyday living like getting around (mobility), bathing, dressing, eating, using the bathroom. Or a cognitive impairment that requires supervision.
Most people do not have a plan to handle long-term care needs, as I noted here in my last post. Almost 70% of Americans over retirement age need help at some point. Chronic health issues and injuries catch up with us as we age.
Long-term care is expensive. In the New York area, the average cost of care is about $80,000 a year, depending on what you need. It can be more and it can be less. Facility care can be much more.
If you need it, how will you pay for it? There are only three possibilities: (1) pay out of pocket; (2) have insurance that pays for it; (3) or Medicaid (welfare) pays for you.
If you have a lot of money, the out of pocket option might work. But most people don’t have enough money to do this. Let’s say you are a middle-class American with about $1 million in your retirement plan. You’ve been thinking you can probably handle retirement if you budget well. But if you haven’t planned how to pay for long-term care, you have a gap in your plan. If you have to withdraw an extra $80,000 a year to pay for care, how long will the $1 million last?
So, now you’re taking out money for living expenses and you’re taking out an extra $80,000 a year (in this example) to pay for the care. In fact, you have to take out even more money to pay the income taxes on the increased withdrawals. At this withdrawal rate, you may deplete the entire $1 million in four or five years. You are facing the risk of ruin in your retirement plan, not to mention spending the money you wanted to leave for the kids.
If you run out of your own money, currently Medicaid would step in to help you. Medicaid does pay a lot of long-term care expenses for people who have run out of money. But Congress is considering bills that could remove the Medicaid option for most people. If Congress takes away Medicaid, you may not have a long-term care option. The kids will have to take care of you instead of you leaving them a legacy.
You don’t have to down this road. If you’re not rich, and you haven’t run out of money, long-term care insurance may be an option. But here’s the thing: you have to get it before you need it. You can’t insure a burning house.
Of course, insurance isn’t free. You have to have the cash flow for it. If you do, it may be the cheapest way to protect yourself and the rest of your retirement plan. You pay premiums that are much less than the benefits that will be paid if you need care. You transfer the financial risk to the insurance company, which protects the rest of your assets.
You might consider long-term care insurance as part of the conservative portion of your retirement portfolio.
When should you get this kind of insurance? Most people look into it when somebody they know, like Mom or Dad, develops a need for care. That’s usually in the 50s. When the 50-something ‘kids’ see the money flowing out the window to pay for Mom and Dad’s care, they realize it could happen to them too, and they begin to consider protecting themselves.
The 50s is a good time to buy long-term care insurance: there are serious pricing advantages to getting it then as compared to getting it when you’re older. You pay more years, but it’s worth it because the price is lower and the benefits are growing every year to offset inflation.
If you don’t have a plan for paying long-term care expenses, consider making one. Fill the gap in your retirement plan. Long-term care insurance can be an intelligent safety net, as I noted here.
See the link below for some good articles in the long-term care section of our website. If you want to know more, ask us. We’re willing to help.