The potential need for an extended time in long-term care (LTC) is a crucial retirement stewardship concern because of its significant financial implications.
We have looked at the types of care, how Medicare and Medicaid, and some other programs fit, and in this third article in a 4-part series, we will look at LTC costs and how you pay them.
This discussion will lead us to the topic of long-term care insurance (LTCI), which we'll tackle in the fourth and final article.
The funding challenge
One of the biggest questions and concerns many people have about their long-term financial security is what they would do if they need LTC. Paying for LTC is a serious question for Baby Boomers approaching retirement and those already in retirement. It is also a major concern for those with aging parents.
Having examined the different types of long-term care, we see how both the need for long-term care and its cost tends to increase with age. (The exception, of course, is an accident or surgery that leads to an immediate need for custodial or skilled-nursing care.)
Still, there is a lot of uncertainty since, 1) we don't know whether we will need it for not, and 2) if we do, we don't know for how long. I'll get into this further in the next article on long -term care insurance, but the stats suggest that while most will need it in some form, they may not need it for very long.
Prior to entering an assisted living or nursing home facility, the cost of care may fall to family members or visiting professionals (in-home care). In those situations, there can be a long period where these professionals assist at less cost than residential care.
But once the move is made to a residential facility, the costs increase dramatically and present the greatest funding challenge. That's because, even apart from LTC spending, funding a long life in retirement can be very difficult.
I have written previously about "longevity risk," which is the risk of losing most or all of one's wealth before the end of life. If an 85-year-old has substantially depleted their savings, they may be in a precarious position, should they need residential care starting late in life.
As discussed in the last article, to get the care they need, they may need to exhaust all resources to pay for care (if they haven't already) and then apply for Medicaid assistance.
Retirees without heirs and a surviving spouse could presumably be less concerned. According to HHS, less than 15% of nursing home patients have a surviving spouse.
The costs of long-term care vary significantly from state to state. For example, according to Genworth Financial, the national average for home-care services (homemaker or home health aide) in 2019 was about $4,300/month (or $51,600/year).
That may be more than you expected (it was for me), but it assumes an annual contract rate divided by 12 months (also assumes 44 hours per week). Someone who needed less assistance would pay less. Perhaps you or your loved one only need help for a few hours a day. If so, your costs would be less.
The challenge, of course, is that these costs are in addition to your current living expenses.
I was surprised to learn that the cost of assisted living is about the same. Also, according to Genworth, the average cost for assisted living in a private, one-bedroom apartment, is about $4,050/month (or $48,600/year). That includes room and board. So, in some respects, it is a more economical option than home-care, assuming the person is not also maintaining (but not occupying) a personal residence.
In Charlotte, North Carolina, where I live, the average cost is a little higher at approximately $4,600 per month (or $55,200/year).
The same Genworth survey found that the monthly cost for a semi-private room in a nursing care facility was $7,500/month ($90,000/year). A private room averages $8,500/month ($102,000/year). Now we're talking big money.
Someone who can afford assisted-living at $50,000/year may not be able to handle twice that for nursing home care. But as we will see, the real cost of nursing home care, which is costly on a daily basis, tends to be of lower duration than home care or assisted living.
The costs for nursing home care in Charlotte, NC, are slightly less: $7,100 for a semi-private room and $7,800 for a private one. This works out to $237 and $260 per day, respectively. (This is important because long-term care insurance has daily payment limits, which may or may not keep up with inflation.)
Other surveys come up with similar numbers, though a little lower than Genworth. The U.S. Dept. of Health and Human Services cites the following:
- $225 a day or $6,844 per month for a semi-private room in a nursing home (also called Long-Term Care Facility or Convalescent Care Facility) Licensed facility that provides general nursing care to those who are chronically ill or unable to take care of daily living needs.
- $253 a day or $7,698 per month for a private room in a nursing home (also called Long-Term Care Facility or Convalescent Care Facility) Licensed facility that provides general nursing care to those who are chronically ill or unable to take care of daily living needs.
- $119 a day or $3,628 per month for care in an assisted living facility (for a one-bedroom unit)
Both assisted living and nursing home care are expensive. Paying for it out-of-pocket for an extended period will be difficult.
Someone who has the resources to live in their own home on $50,000 a year can probably afford assisted living. But that assumes that their existing costs of homeownership are substantially reduced or eliminated entirely.
That may mean selling or renting-out their existing residence, especially if it has a mortgage. (If not, only taxes and maintenance are the concern.) A family member or trusted adviser will probably need to assist with that.
Another option is to tap the home's equity, which we will look at shortly.
When things get dicey is when a person needs nursing home care. Based on the costs and stringent eligibility requirements for Medicaid and other forms of assistance, paying for LTC is a challenge for many families.
Some may be able to pay for some types of care out-of-pocket, but many will have to leverage other financial assets (such as their homes) and find different creative ways to pay for quality care.
Paying for it
Here is a list of some of the options. Some will focus on one or the other. Others will use a hybrid approach. (After each section, should you want additional assistance, I have included a link to a pertinent article or series that I have previously done.)
Private Pay (from personal funds and other sources)
These are the major private financing options for LTC. Funds can come from one or more different sources, depending on what's available when a person needs LTC.
Personal savings. This includes both retirement and non-retirement savings. If the person has been using this money to live on, they may deplete those accounts by the time they are needed to fund LTC. But someone who was able to support a $50,000 to $75,0000 a year lifestyle with Social Security and income from savings should fund assisted living or most types of nursing home care.
Sometimes, the person cannot pay the full cost. Family members may pool their resources to help,
Further Reading: Your Four Most Important Financial Decision (#4): Saving and Investing
Pensions and Annuities. Income from a pension or annuity can also help close the LTC funding gap. Pensions typically payout over a lifetime, so they are a reliable source of funds. But if you do not set them up correctly, a surviving spouse may not continue to receive payments should the pensioner predecease them.
Some may also have annuity income. Perhaps you entered into an annuity contract with an insurance company to provide retirement income or to help pay for long-term care services. In exchange for a single payment (or a series of payments), the insurance company will guarantee to make regular payments back to you over a pre-determined period (for a specific term or for as long as you and perhaps a survivor live).
When the payments begin will depend on whether you purchased an immediate annuity or a deferred annuity. The former provides immediate income (which is why they're often referred to as "Single Premium Immediate Income Annuities"—SPIA). The later are ofter purchased as "longevity insurance" to provide a guaranteed income stream that begins later in life. You hand over a lump sum at age 65 but don't start receiving guaranteed income until much later (age 85, for example).
Further Reading: Should I Include Annuities in my Retirement Plan (Part One)
Home Equity. There are several ways someone with home equity can leverage it to help pay long-term care expenses. If the transition from their family home to assisted living or long-term care is permanent, the person can sell the house use the proceeds to pay for care. Alternatively, they could rent it out and use the rental income to help fund it.
Another increasingly common option is to take out a reverse mortgage. A reverse mortgage allows the person to remove the equity from their home (all at once, or in regular payments) and then pay it back when the house is sold. However, this arrangement makes the most sense for someone (or has a spouse who does) and wants to stay in their home but needs additional income as repayment is required after it is no longer used as a primary residence for either of them.
To get a reverse mortgage, you must be 62 or older. There aren't any other medical or financial requirements. The loan proceeds, which can be taken in a lump sum or a series of tax-free, can be used for any expense. If you have an existing mortgage or other obligation on your home, you will have to use the funds to pay them off first.
The home equity decision must be made in light of the Medicare rules for asset depletion. A reverse mortgage may affect Medicare eligibility, depending on what kind of payout is selected. In most states, a person can't have more than $2,000 in assets ($3,000 for married couples), so a lump sum payout would increase that amount substantially.
It's important to reiterate that once you (or your spouse) move out of the home, the reverse mortgage must be paid. Therefore, a single person who wants to move into an assisted living or long-term care facility who wants to keep their home may want to consider other funding methods. A married person living in the house, with a spouse in long term care, could use a reverse mortgage to provide income to cover living expenses as they live in-place.
Further Reading: Home Equity and Your Retirement
Life Insurance. If someone who needs long-term care has a whole life insurance policy, it may have built up a cash value that can be used to help fund long-term care expenses. Other policies offer a combination product of both life insurance and long-term care insurance.
Some life policies have an "accelerated death benefit" and provide tax-free distributions while you are still alive. Those amounts reduce the policy payout to your beneficiaries. Someone may be eligible for this if they need extended long-term care, are terminally ill, or have a life-threatening illness.
Most people don't realize that life insurance policies can be bought and sold. You may be able to sell a cash-value life insurance policy, which is known as a "life settlement," if you are age 70 and older. The proceeds are taxable but can be used for any reason, including LTC.
Similarly, a terminally-ill person can sell their policy and receive a percentage of the death benefit. This transaction is called a "viatical settlement." These pay immediate cash, but can be harder to get than a "life settlement."
I view both of these options as last resort funding sources for LTC.
Further Reading: Should Whole Life Insurance be a Part of Your Retirement Plan (Part One)
Trusts. You or your family can fund a trust to pay for LTC expenses. Trusts are complex legal instruments used to transfer assets to another person, the "trustee." The trustee then manages and controls the assets for another person, the person or another, the "beneficiary."
Setting up an irrevocable trust to preserve some of your assets can "protect" them should you experience a catastrophic illness. These types of trusts are sometimes called a "Long Term Care Asset Protection Trusts," "Medicaid Trust," or Income Only Irrevocable Trust.
Two types of trusts can help pay for long-term care services: charitable remainder trusts and Medicaid disability trusts. They are used to preserve assets if you have to spend an extended time in long-term care. During that time, your assets are "protected" for long-term care Medicaid eligibility purposes.
These types of trusts are complicated, so you should consult with both an attorney and a financial professional on how they might fit into your long-term plans.
Further Reading: Estate Planning and Your Will
We discussed the flagship government programs, Medicare and Medicaid, in detail in a previous article. The Veterans Administration also offers programs, such as "Aid and Attendance," to help eligible veterans pay for care.
There are also state programs, such as the "State Health Insurance Assistance Program" (SHIP). This is a national program offered in each state that provides counseling and assistance to those on Medicare, Medicaid, and Medigap plans.
Long-Term Care Insurance (LTCI)
LTCI is in a category by itself. Unlike other funding sources, it is not an account you can draw money from, nor is it a form of public assistance. It is an insurance policy, which under certain conditions, covers many types of long-term care expenses, including palliative and hospice care.
The exact extent of the coverage depends on the type of policy you purchase and its coverage provisions. Costs can vary widely based on coverage and your age when you buy the policy and any "options" you elect.
We will discuss LTCI in detail in the next article—the fourth and final one in this series. Deciding whether you need LTCI and if you should purchase it, and when, is decidedly more complicated than you might think.