As Baby Boomers continue to age, more families will confront the need to provide loved ones with long-term care. While the personal and emotional cost of such care is often significant, its financial cost could be especially challenging for some families.
The high cost of retirement
To understand the long-term care challenge, you'll need to start with the idea that retirement can be expensive, no matter if you are thrifty or are accustomed to spending a lot. According to the latest retiree health care cost estimate from Fidelity Benefits Consulting, a 65-year-old couple retiring this year will need an average of $280,000 (in today's dollars) just to cover medical expenses throughout retirement.1
This number only covers healthcare—not the other piece of the puzzle, long-term care. Odds are, you'll probably face long-term care costs in your lifetime. A study by the U.S. Department of Health and Human Services found that a little more than half of all individuals age 65 and older will need long-term care services and supports.
Types of care
This care can be expensive, especially in major metropolitan areas. Depending on where you live, long-term care in a nursing home will cost at least $50,000 to $100,000 for a year's stay in a semi-private room, according to the Genworth 2017 Cost of Care survey.
Long-term care costs are all over the map. On the low end, adult day health care averages around $18,000 per year. In between this minimal care and nursing home confinement are intermediate types of care, including homemaker services (for cooking, housecleaning, and running errands), home health aides and assisted living facilities.
Because few people have the financial means to meet the most expensive care costs out of pocket, planning for future costs should involve a strategy that includes one or more of the following options:
Medicaid. In order to qualify for this government assistance program, beneficiaries must meet stringent qualifications involving both income (varies by state) and so-called countable assets ($3,000 for couples). These levels are extremely low. And if you're hoping for some help from Medicare, know that this insurance pays only for a limited hospital stay immediately after the onset of needing medical care.
Long-Term Care Insurance. This could be expensive, especially if you're older than age 65 when premiums begin to increase most dramatically. If you have health problems, you might not qualify or, if you do, might not be able to afford a policy. Consider cutting insurance costs by buying a smaller daily benefit or increasing the elimination period, which is the time between when care is needed and when insurance payments begin.
Hybrid Insurance. One innovation that may help to cut costs is a hybrid whole life insurance policy. This type of insurance usually offers an either/or option. You can use a portion of the life insurance policy benefits to fund long-term care, which would reduce or eliminate the death benefit. Or if you don't need to pay for care, the policy will pay out its full benefit to beneficiaries. However, understand that this hybrid will not pay full benefits for both life and long-term care. For that, you'll need two policies.
Private Funding. This makes it up to you. Save. Invest. Put more money away into your 401(k) plan and your Health Savings Account. The latter is triple tax-free, meaning your contributions, potential earnings and qualified withdrawals (including for long-term care costs) are tax-free.2 Consider making the maximum contribution of $6,900 annually for a couple, plus an extra $1,000 in catch-up money if you're at least age 55.
Beyond saving for and insuring against long-term care costs, there are other smaller steps that could turn into big savings down the road. If you plan to remain in your house, consider retrofitting it by making doors wider for walkers and wheelchairs. You can also build a ramp, install bath and toilet handrails and consider other measures that offer continued mobility. Also, consider one-level living options if you're looking to downsize from your current home.
The easier you make getting around in your house, the more likely you could receive less-expensive home care services if you end up dealing with limited mobility in the future.
Even if you're healthy now, it pays to prepare financially. Saving or insuring for some costs is better than being caught off guard. The odds that you'll become disabled in retirement aren't possible to quantify, so you can prepare for the worst and hope for the best. If you can't save for all the potential cost, save for some of it. The older you will appreciate the steps you take today.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917