Planning for Your Retirement Healthcare Needs
Nothing can devastate a carefully-considered and executed retirement plan faster than unexpected health care costs.
But just because we can never know the precise time when an illness, accident, or injury may occur, we can be assured that something will happen to us as we age that could require some form of long term care.
Long term care, defined
According to longtermcare.gov, long term care refers to:
“a range of services and supports you may need to meet your personal care needs. Most long-term care is not medical care, but rather assistance with the basic personal tasks of everyday life… such as:
- Using the toilet
- Transferring (to or from bed or chair)
- Caring for incontinence
- Managing money
- Taking medication
- Preparing and cleaning up after meals
- Shopping for groceries or clothes
- Using the telephone or other communication devices
- Caring for pets
- Responding to emergency alerts such as fire alarms”
Any accident, illness, injury that restricts a person’s ability to function independently can call for long term care.
It is important to note that none of the above-listed items are related to medical expenses. That’s why they aren’t covered under Medicare or Medicaid.
What are the chances I’ll need long term care?
Pretty good: 70% of individuals 65 or older will require some form of long term care in their lives.
But while the idea of long term care often conjures images of bedridden Alzheimer’s patients or other similarly incurable, permanently debilitating maladies, statistics show that most men require 11 months of long-term care in retirement, with women needing 17 months (according to the Center for Retirement Research).
Your chances increase depending on whether you have (or have a family history of) chronic health problems (i.e.: diabetes or high blood pressure), or poor dietary and exercise habits.
The implication is that while some long term care will most likely be needed, depending on circumstance, it could very well be handled within the context of an existing retirement plan, with a few simple modifications.
Where should I start?
Because long term care is an expense, investors should first try to determine what their potential gross cost could be.
For long term care, the national average is $220 per day, be it for in-home or nursing home care. If you’d like to have 3 years’ worth of expenses covered, an individual would need approximately $240,000; or $480,000 per couple.
Can I self-fund my long term care?
Most advisors recommend it… if the client can afford to do so.
Purchasing insurance of this nature is often an exercise in guesswork. And nobody wants to pay for insurance they end up not needing.
In the above scenario, a couple would set aside $480,000 specifically for long term care expenses. They could put it in a low-risk interest bearing account that would offer a small hedge against inflation.
Whatever they don’t use will go to their estate when they die. Any amount over the $480,000? Well, they’d end up having to pay that out-of-pocket anyway, insurance or no.
But self-funding is typically an option only for higher-income retirees. Those with more modest means must consider long term care insurance as their best option.
Long term care insurance (LTCI)
Like most insurance, LTCI takes many forms and offers varying benefits. For a higher benefit total, or for a less-healthy individual, premiums will be higher. That said, premiums are typically in the $2,000 – $4,000 per year range. Keep in mind that the National Association of Insurance Commissioners believes policyholders should not pay more than 7% of their income on LTCI premiums.
Importantly, insureds should always purchase an inflation rider to the policy. Things get more expensive over time, and thus the purchasing power of your insurance will decline as well. Make sure the time value of money is accounted for.
How does LTCI work?
The way LTCI normally works is that the insured pays a premium (usually starting around age 60) until benefits are drawn.
Using our above example, let’s say the husband falls and breaks his leg. His wife is frail and unable to offer the assistance he needs. The couple can invoke the LTCI and begin receiving payments for in-home care. After 6 months, the husband is healed and can resume normal life.
During those 6 months, no premiums are paid. However, once benefits stop flowing, the premiums must start to be paid again.
(Note: Policies are for a set dollar amount – not a set time period. An insured can take the full amount in one year or 20 – all the insurance company cares about is the total dollar benefit of the policy.)
Close to retirement?
While it is advisable for everybody to do so, for those close to or already in retirement, it is extremely important to consult with a Registered Investment Advisor to assess your individual situation and plan for retirement healthcare needs.
Long-term care is important, but if you have little in the way of retirement assets, paying a hefty LTCI premium might not be the best way to spend your precious assets.
Long term care is NOT related to your medical expenses such as doctor visits, prescription drugs, or hospital stays, so those expenses must be considered independently.
Medical expenses not covered under the government-sponsored Medicare Part A include:
- Premiums for Medicare Part B
- Medicare supplement premiums or Medicare co-pays
- Medicare Part D (prescription drug benefit) premiums and co-pays
By accounting for both medical expenses AND potential long term care needs, those planning for their retirement can rest much easier.