What do you plan for when you think “retirement”?

When planning for retirement, most of us are concerned primarily with making sure we have enough money to pay our basic living expenses, have enough for discretionary spending, and ideally have enough to get out and enjoy our golden years with funds for the pursuit of hobbies, going on vacations, and spending time visiting friends and family.

Beyond savings for everyday life, many people also hope to leave a financial legacy for children or grandchildren. However, there’s a reality to consider: unexpected health changes could mean a need for assisted living or even nursing home care. As much as we might not like to think about it, LTC is a realistic part of retirement to prepare for financially.

What does Long-Term Care (LTC) include?

LTC covers a broad range of non-medical care intended to help you maintain your quality of life. If you become unable to perform two out of six basic Activities of Daily Living (ADLs), you may need LTC. ADLs include bathing, dressing, using the toilet, moving in and out of bed or a chair, managing incontinence, and eating.

If you can’t perform at least two of these, private LTC insurance or Medicaid assistance may come into play. But LTC needs can go beyond ADLs, including what are called Instrumental Activities of Daily Living (IADLs), like housework, taking medications, meal preparation, shopping, managing finances, and responding to alarms.

Why is Long-Term Care Insurance expensive?

LTC can range from a few weekly visits from a caregiver to full-time nursing home care. Unfortunately, medical insurance and Medicare generally don’t cover these costs, so they often come out of pocket.

LTC insurance is available, but it’s known for its high premiums. Why so expensive? Because there’s a 70% chance an individual will need some form of LTC at some point, and an 85% chance that at least one spouse in a couple will require it. Insurance companies define insurability based on the likelihood they won’t have to pay a claim—so for LTC, everyone is considered “high-risk.”

Why are the costs of Long-Term Care?

A home health aide averages about $4,500/month, similar to assisted living. Nursing home care can range from $8,000/month for a shared room to over $14,000/month in high-cost areas like San Jose, California. Knowing regional costs can be vital for realistic retirement planning. Many people require LTC for three years on average, which can easily add up to $200,000 or more—sometimes far higher with extended care needs.

What happens if you do not have LTC insurance?

If you need assistance but don’t have LTC insurance, Medicaid is an option, but qualifying requires a significant “spend down” of your assets. Medicaid eligibility rules allow for retaining primary residence, basic belongings, one vehicle, certain life insurance policies, burial funds, and assets in specific trusts. Other assets like savings, investments, extra properties, and additional vehicles must typically be used to pay for LTC first.

Gifting or transferring assets to family just before applying for Medicaid isn’t an option due to a five-year “look-back” period, during which financial records are checked for large transfers to prevent asset sheltering.

What is the best way to pay for Long-Term Care?

So, what’s the best way to manage these costs? Before purchasing LTC insurance, consider consulting a fiduciary financial advisor to help weigh options given the high cost of premiums.

For those with traditional IRAs, using these funds for LTC can incur significant taxes. Roth IRAs and other post-tax money are often better choices. If you hold life insurance with cash value, tapping into it can be tax-efficient, and some policies offer accelerated death benefits if LTC is needed.

Annuities that guarantee income with options for increased payouts during LTC needs can also provide support—all without medical underwriting.

This is only a superficial glossing over of Long-Term Care, as the costs—and the strategies to pay for it—are complex. More information is available at https://longtermcare.acl.gov. A financial advisor with experience in LTC planning is a great way to get help implementing your LTC retirement contingency plan. For more information on how we can help you, please visit us at www.f5fp.com, or schedule a free consultation.

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