By Bryan Trugman, CFPⓇ
You’ve probably heard the saying, “People don’t plan to fail, they fail to plan.” In our experience, overlooking long-term care expenses that you could incur later on in life is one of the biggest blind spots people have as they head into retirement. Research suggests that most Americans turning 65 this year will need at least some form of long-term care as they age, and it can be more costly than you expect.
What Is Long-Term Care and What Does it Cost?
Long-term care is needed when people are unable to do basic activities of daily living on their own. These activities include eating, bathing, using the toilet, transferring from one place in the house to another, continence, and dressing. While we take these activities for granted when we’re younger, there’s no guarantee that we’ll be able to do everything we need to for ourselves later in life.
In terms of cost, there are many factors that determine what you’ll need to pay for your long-term care needs. Most significant are your location and the types of service you will need.
Like most things in New York, prices here tend to be higher than the national average, and that’s true with long-term care. Yet depending on the type of care you need, you may not need to pay an arm and a leg. If we need long-term care, the ideal scenario for most of us is for a caregiver to come to our home and give us the help we need. In New York, the wage for those services is about $30 per hour. This can add up quickly. Let’s say your need initially is 8 hours of care each day. That would cost about $240 per day, or about $7,200 per month.
Yet if you have a more significant illness and aren’t able to stay at home safely, then you’ll need to either stay in an assisted living facility or a nursing home. In New York, an assisted living facility costs on average $6,100 per month and a private room in a nursing home costs $14,037. If you need to stay there for many months (or even years), the costs will be quite substantial.
Misconceptions About Long-Term Care
Before we dive into how to pay for long-term care, it’s important to clarify some misconceptions. A number of people mistakenly assume that Medicare—the health insurance program offered to people over the age of 65—pays for long-term care costs. Unfortunately, that is not the case. Medicare does not cover long-term care expenses or those costly nursing home stays.
Another significant misconception some people have is that a spouse or child will be able to take care of them. In all likelihood, your spouse, who at that time may be in their 70s, 80s, or 90s, won’t physically be able to do the necessary work to maintain your care. And while your children may be close by, they may be too busy with their own lives and responsibilities to give you the care you need. Hoping that family or friends can take care of these important functions is a risky bet I would rather you avoid.
Options to Pay for Long-Term Care
So how can you build these expenses into your retirement plan if you had planned on mitigating housing costs in the remaining years of your life? The three most common options include purchasing a long-term care insurance policy, paying for it out of pocket, or utilizing Medicaid if you qualify.
Over the last 10 years, the world of long-term care has drastically shifted as insurance companies experienced higher-than-expected claims, which caused them to scale down benefits and increase costs. One company has applied to the State of New York to raise their premiums by 250%! While they likely won’t be approved for a rate increase that high, the main takeaway for you is to evaluate your insurance options sooner rather than later so you can keep your costs down.
Not only do insurance companies keep raising premiums, but every year you wait, the older you get, which will also increase your premiums. And even more worrisome is if you get some kind of preexisting illness, you could be ineligible for insurance completely, which would eliminate this option altogether with no choice on your part.
The first type of policy to consider is a standalone or traditional long-term care insurance policy. These policies typically offer the most bang for your buck. The criticism they receive is that if you don’t use the policy, you lose the premiums you paid for. Yet just like your auto insurance, you’d rather not get into a car accident and be forced to use your coverage, right?
In these types of plans, you’re essentially purchasing a pool of money to be used for your care should you need it. Every policy is different in terms of how it’s structured, the overall policy limits, and how much money you have access to each month.
Before you purchase one, you’ll want to understand what is covered, what isn’t, and how many different care options will be in your neighborhood. In the state of New York, you can also get a tax credit up to 20% of the premium you pay, up to $1,500 per year.
If that doesn’t sound like a good option for you, you can also consider a hybrid policy, which will combine life insurance with long-term care, or combine an annuity with long-term care. These policies cover additional risks compared to a standalone policy, but they typically don’t offer as much coverage per dollar spent. In my 14 years of experience, I’ve found that simplicity typically trumps complexity, which is a guiding principle of our work for clients in their financial plan and long-term care plan.
Protecting Assets Through Estate Planning
Imagine that you choose not to buy any type of long-term care policy, but you need significant long-term care help in the future. Not just a few thousand dollars of care, but hundreds of thousands of dollars. If you get an illness like Alzheimer’s that can last for years, in an expensive state like New York, those costs can add up quite quickly. And the money you spend on care will be money that your kids, grandkids, and favorite charities won’t receive.
But there is a potential solution in that situation. As mentioned above, you can also use Medicaid (a state and federally run program) to help cover some or all of your long-term care expenses. This type of strategy is complex and involves working with a qualified estate planning attorney, as well as your financial advisor, to put some or all your assets into a special type of trust. Once that is complete, and the required waiting periods are met, those assets won’t be listed as assets when you apply for Medicaid, which will allow you to have Medicaid pay for some—or all—of those long-term care expenses for you.
Partner With an Expert
No one wants to face the reality of needing long-term care, but for most people, it’s a very real possibility. There are many options when it comes to financially preparing for your long-term care needs. While this can seem overwhelming, the good news is you don’t have to make these decisions alone. When you partner with trusted experts, like the team at Attitude Financial Advisors, we can help you understand your options so you can make the smartest decision for you and your family. Reach out to me via email at email@example.com or give me a call at (516) 762-7603 to set up a free consultation.
Bryan Trugman is managing partner, co-founder, and a CERTIFIED FINANCIAL PLANNER™ practitioner at Attitude Financial Advisors. With more than 14 years of experience, Bryan specializes in addressing the financial needs of new parents as they seek to realign their finances, assisting divorced individuals as they navigate an unforeseen fork in the road, and strategizing with those seeking to accrue a dependable retirement nest egg. Bryan is known for being a good listener and building strong relationships with his clients so he can help them develop a customized financial plan based on what’s important to them. He is passionate about helping his clients experience financial confidence so they can worry less and play more. Bryan has a bachelor’s degree in industrial and systems engineering with a minor in mathematics from State University of New York at Binghamton. He has served on the board of the Financial Planning Association and continues to be actively involved in the national organization. He is also a member of the Plainview-Old Bethpage Chamber of Commerce and has served as its vice president and as a board member. When he’s not working, you can find Bryan on the ballroom dance floor or engaged in a fast-paced game of doubles on the tennis court. To learn more about Bryan, connect with him on LinkedIn. Or, watch his latest webinar on: How Much Is Enough? A Surprisingly Simple Way to Calculate Your Retirement Savings Needs.