As one of the biggest drains on retirement savings, long-term care expenses pose a big risk for comfortable enjoyment of your golden years. But three simple steps can put you on the right track to saving for your future needs.
65 is a big number
Saving for retirement is a big deal, and yet the vast majority of people leave out one crucial segment of future expenses -- long-term care. Nearly 65% of people over age 40 said they've done little or no planning for ongoing living expenses, with 30% saying that it's because they don't want to think about it, according to a congressional study on long-term care in the U.S.
But the fact remains that 70% of people over the age of 65 will need some form of long-term care in their later years.
With the median annual cost of nursing home accommodations running above $75,000 for a semi-private room, the anticipated costs for those needing several years of care can be burdensome on a fixed income. And with the current state of nonpreparedness, Americans are not ready to shoulder the costs of paid, long-term care.
Taking the first step
To start off on the right track, you need to acknowledge the likelihood of needing care in the future and what it will cost. This action alone will get you ahead of the 60%+ who haven't started planning.
Though it can be tough to determine your needs down the road, looking at your current health and family history can be a good starting point. For example, if you know that your parents and grandparents all lived to their late 80s and needed some form of care, you can estimate what your costs would be for similar needs.
One helpful source for recent cost data comes from Genworth Financial's annual Cost of Care Survey:
Along with the median costs for the nation, the insurer and retirement solutions company offers state-by-state data. The costs vary greatly by state, with the Northeast region posing some of the highest costs, while the Southeast (excluding Florida) have some of the lowest rates.
The math may not be exact, but with the current pricing data and anticipated growth rates you can get an idea of your future long-term care expenditures.
Next: know your options
One reason for the nation's lack of preparation for long-term care expenses is the lack of options available to planners. Right now, there are only a handful of options for funding long-term care costs.
The first is specialized insurance for long-term care. Though this type of insurance has been offered for more than 30 years, it is little used -- only 10% of the nation's population over 50 is insured for long-term care needs.
Premiums are paid in advance for coverage of care expenses down the line. Some employers offer LTC insurance to employees and there is a tax deduction for qualified premiums. But drawbacks include medical exclusions and high premiums. It's best to get a LTC insurance policy early on, before any medical problems occur, in order to reduce your risk of nonqualification and also to keep premiums low.
The second option is self-insuring, meaning you pay for costs out of pocket. There are a number of savings options, including IRA accounts and specialized annuities, but it essentially just means that you're adding a designated amount for the care expenses to your existing retirement savings.
The third option is governmental assistance, including both Medicare and Medicaid. Both of these programs have limitations, with Medicare being the more restrictive.
Medicare serves people 65 and older (along with certain disabled and/or ill people), but only with short-term needs. Specifically, Medicare will pay for up to 100 days of care at a skilled nursing facility per benefit period, but only after a three-day hospital stay. The program covers 100% of the costs for the first 20 days, with a co-pay needed for the remaining 80-day period.
The second governmental program, Medicaid, provides help to those with low income and limited resources. The program has strict asset limits for eligibility, which vary from state to state. People will often find that they have to pay out of pocket to reduce their assets before Medicaid will accept them.
One exception to the Medicaid asset limitations is the Long Term Care Insurance Partnership Program. Individual states participate in the program, which partners long-term care insurance with Medicaid. The program allows you to keep a higher amount of assets than would usually be allowed for Medicaid eligibility. Each participating state has its own requirements for what counts as a qualified insurance policy.
Last, but not least
Perhaps the most important part of planning for long-term care expenses is to start early. The same principle for investing early applies to saving for care costs, whether you're buying a specialized insurance policy or not.
Though no one likes to think about needing care for everyday activities, preparing for the burden of long-term care costs should not be put off till later. With the three steps outlined above, you should have a decent head start on planning for future costs -- giving you the confidence to look forward to retirement.
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