If you don’t plan well, you could find yourself in financial trouble.
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If you’re a retirement planner, you’ve probably spent a lot of time making important decisions like when to start drawing down your savings, what withdrawal rate to use, and when to enroll in Social Security. You may also be aware that medical costs tend to be one of the largest expenses for seniors, and that you need funds set aside to cover Medicare premiums, coinsurance, and deductibles.
But there’s one big retirement expense that too many people don’t plan for. It’s long-term care. An estimated 70% of people who live to age 65 will need some type of long-term care during their lifetime. If you think Medicare will cover the cost, you’re wrong. Therefore, it is important to have a solid plan to deal with this huge expense.
Why Medicare isn’t picking up the long-term care tab
The reason Medicare doesn’t pay for long-term care is simple. This insurance is designed to cover medical care, not custodial care, which means assistance with daily living.
If you require skilled nursing care or rehabilitation after a covered hospitalization, Medicare will often pay for it for a limited time. However, if you age and need help with bathing, dressing, and managing daily activities, that is considered custodial care. Medicare typically does not cover these services, whether provided in the home, in a nursing home, or in a nursing home.
Long-term care costs can add up quickly
The problem with long-term care is that it can be expensive. If you need it for a long time, your retirement savings can easily be wiped out.
Nationally, the median annual cost for a non-medical home caregiver is $80,080, according to CareScout. The median annual cost of assisted living is $74,400.
Things get even worse when you need a nursing home. The median annual cost for a shared room is $114,975. For your own room, it’s $129,575.
Options for covering long-term care
Since Medicare cannot be expected to take on the burden of long-term care, there are two basic options for covering the cost. Get insurance or pay for it yourself (also known as self-insurance).
Long-term care insurance transfers much of the financial risk to the insurance company. If you end up needing a covered service, your insurance may reimburse some or all of the cost, depending on the coverage you purchase.
If you are self-insured, you will have to pay for your treatment yourself. However, if you have enough funds to pay directly, this approach may work better for you.
The problem with long-term care insurance is that the premiums are high. If you don’t end up needing it, your money will be wasted.
If you allocate a portion of your IRA or 401(k) to long-term care, you can invest that money and manage it as you see fit. If you ultimately no longer need to use the money for long-term care, you can pass it on to your heirs or find another way to put it to good use.
There is no right or wrong way to pay for long-term care costs, but if you are considering purchasing insurance, the timing of your application is important. The ideal time to apply is usually in your 50s or early 60s when you are still relatively healthy. The earlier you purchase coverage, the lower your premium will usually be.
Plan now to protect your future retirement
It’s not easy to accept the fact that someday you may need help with your daily life. But it’s important to plan for long-term care so it doesn’t end up being a burden or disruption to your loved ones.
So, in the process of thinking about your IRA withdrawal strategy and optimal Social Security filing age, research your long-term care costs and decide whether to insure or self-insure. If it’s the former, if you’re over 50, start shopping to increase your chances of qualifying for insurance and getting an affordable rate.
The sooner you start planning, the more options you have and the more peace of mind you may have.
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