Planning for retirement involves more than just setting aside savings; it requires careful consideration of potential long-term care needs. With increasing life expectancy, many individuals may require assistance with daily activities as they age. Long-term care encompasses a range of services that support individuals who are unable to fully care for themselves due to aging, illness, or disability. Here, we’ll delve into the various aspects of long-term care in retirement, including insurance options, self-funding, types of care, costs, and important considerations.
Understanding Long-Term Care
Long-term care refers to a variety of services designed to meet a person’s health or personal care needs over an extended period. These services can be provided at home, in the community, or in residential facilities like nursing homes. Here are the main types of long-term care:
- In-Home Care: This type of care allows individuals to receive assistance with daily activities such as bathing, dressing, and meal preparation while remaining in their own homes. Caregivers can be hired privately or through home health agencies.
- Assisted Living Facilities: These facilities provide housing, meals, assistance with activities of daily living (ADLs), and supportive services in a residential setting. Residents typically have their own apartments or rooms but may require help with certain tasks.
- Nursing Homes: Nursing homes offer round-the-clock skilled nursing care for individuals who need extensive assistance with medical and personal care needs. They are suitable for those with complex medical conditions or disabilities that require constant supervision.
Long-Term Care Insurance
Long-term care insurance (LTCI) is a type of insurance policy designed to cover long-term care services. It helps policyholders pay for the cost of care that isn’t covered by health insurance, Medicare, or Medicaid. Here are some key points to consider about LTCI:
- Coverage: LTCI policies vary in coverage, but they typically cover services such as nursing home care, assisted living, in-home care, and adult day care.
- Premiums: Premiums for LTCI can be prohibitively expensive, and they typically increase with age. Most insurance companies have wisened up to just how expensive long-term care is and have thusly made costs far too costly for most to afford, necessitating self-funding. However, purchasing a policy earlier in life can result in lower premiums.
- Benefits: LTCI policies may have a waiting period before benefits kick in, known as the elimination period. Policyholders can choose the amount of coverage and length of benefit period based on their needs and budget.
- Considerations: Before purchasing LTCI, individuals should carefully review the policy’s terms and conditions, including any exclusions or limitations.
Self-Funding Long-Term Care
Self-funding long-term care involves using personal savings, investments, or other assets to pay for care expenses. While this approach offers flexibility and control over care decisions, it also requires careful financial planning to ensure adequate funds are available. A financial planner like the advisors at Farnam Financial can help you make sense of the complex problem of self-funding long-term care. Here are some considerations for self-funding long-term care costs:
- Savings and Investments: Individuals can earmark a portion of their retirement savings or investments to cover potential long-term care expenses. This may include retirement accounts, such as 401(k)s or IRAs, as well as other assets.
- Health Savings Accounts (HSAs): HSAs allow individuals to save money tax-free for qualified medical expenses, including long-term care services. Contributions to HSAs are tax-deductible, and withdrawals used for eligible expenses are tax-free. To participate in a HSA, you must be enrolled in a high-deductible health insurance plan.
- Reverse Mortgages: For homeowners aged 62 or older, a reverse mortgage can provide a source of income by converting home equity into cash. This can help cover long-term care costs while allowing individuals to remain in their homes.
- Medicaid: Medicaid is a joint federal and state program that provides health coverage to low-income individuals and families. Medicaid should only be considered a last resort option for two primary reasons. First, one cannot have more than $2,000 in countable assets as a single person or $3,000 as a married couple. Only people in extreme poverty will qualify. Second, the quality of care provided by Medicaid is often worse than the care received if you were to self-fund long-term care or use LTCI.
Cost of Long-Term Care
The cost of long-term care can vary widely depending on the type of care needed, geographic location, level of care required, and other factors. Here are some estimated costs for long-term care services in the United States and in Phoenix, Arizona for 2023-4:
- In-Home Care: The national median cost for a home health aide is approximately $25 per hour, according to the Genworth Cost of Care Survey. In Phoenix, AZ the 2023 cost of a Home Health Aide is $7,055 per month.
- Assisted Living: The median monthly cost for assisted living facilities is around $4,300, according to Genworth. In Phoenix, the average cost is $5,500 per month.
- Nursing Homes: Nursing home care is the most expensive option, with median costs exceeding $8,000 per month for a semi-private room. Private rooms can cost even more, averaging over $9,000 per month. This is on par with costs currently in Phoenix.
- Inflation: The cost of long-term care is inflating at a quicker pace than inflation. Genworth found that the 5-year inflation rate from 2017-2021 for an assisted living facility was 4.4%.
Other Considerations for Long-Term Care
In addition to insurance, self-funding, and cost considerations, there are several other factors to keep in mind when planning for long-term care in retirement:
- Advance Directives: Creating advance directives, such as a durable power of attorney for healthcare and a living will, can ensure that your healthcare wishes are honored if you become unable to make decisions for yourself.
- Caregiver Support: If relying on family members or friends for caregiving assistance, it’s essential to have a support network in place to prevent caregiver burnout. This may include respite care services or support groups for caregivers.
- Long-Term Care Planning: Long-term care planning should be an integral part of retirement planning. Consulting with a financial advisor or elder law attorney can help individuals develop a comprehensive plan tailored to their unique needs and circumstances.
How Farnam Financial can help.
Long-term care is a critical aspect of retirement planning that requires careful consideration and preparation. Whether through insurance, self-funding, or a combination of both, individuals should explore their options and plan accordingly to ensure they have access to the care they need as they age. The advisors at Farnam Financial are here to help you make sense of the complexities of long-term care, make informed decisions regarding your long-term care, and help make this complex problem one that is easy to understand. Schedule a free 30-minute consultation today!
