Long-term care is becoming an increasingly important topic, and for good reason. Americans are aging, with 10,000 people turning 65 in the U.S. each day. And nearly 70% of people retiring today will require some type of long-term care during their lifetime, according to the Department of Health and Human Services (DHHS). The cost of long-term care can be astronomical, yet even the most financially secure people are completely ignoring the looming threat of long-term care in their retirement planning.
Most baby boomers are either unprepared or haven't planned for a long-term care expense, according to a Bankers Life survey of 1,500 middle-income Americans aged 54 to 72. In fact, boomers were more likely to plan for their death than have a long-term care plan -- 81% made some type of funeral arrangements for when they die, while only 32% have a plan for how they will receive care in retirement. The lack of long-term care planning is a bigger problem when you add in the harm that such a huge unexpected expense has on someone's retirement savings, especially in cases where their nest egg is meager in the first place.
DHHS estimates the average total cost of care for a retiree is $138,000. However, 79% of respondents said they have no money set aside for their retirement care needs. And for those who do have long-term care savings, the median amount saved is just $40,000. Still, 67% of those surveyed said they know someone who required care in retirement, and 36% said they can't rely as much on friends or family for around-the-clock care. So why aren't more boomers better prepared?
Here are three surprising reasons that contribute to this lack of awareness, and dearth in savings for long-term care:
Baby boomers may be overconfident in their ability to manage future long-term care costs. Of those surveyed by Bankers Life, 74% said they were confident in their ability to handle future healthcare costs. This misplaced confidence could be a reason boomers expended more effort and spent more money to plan for their death.
Half (50%) of the respondents had less than $5,000 saved in an emergency fund, and one-third had less than $1,000 set aside for emergencies. Given the high cost of long-term care, and the collective weakness in emergency funds, boomers' confidence in being able to manage long-term care costs appears unrealistic. Perhaps people are relying on Social Security benefits too much, as well as Medicare.
2. Lacking awareness of basic Medicare facts
Medicare will only pay for some long-term care expenses such as skilled nursing care after a hospital stay, and there are limits. Plus, Medicare does not pay for custodial or home healthcare. Most of those surveyed think Medicare will pay for a future healthcare event, with 56% mistakenly identifying Medicare as a source to pay for future long-term care.
Awareness is growing, though. About 40% expect to use personal savings for long-term care, an increase of 15 percentage points from the same survey in 2013.
3. Not knowing where to turn for advice
The greatest barrier to planning for care in retirement is a lack of trust. Roughly 32% of boomers surveyed said they need and want advice but don't know whom to trust. Most seek the help of a family member (36%), while only 7% turn to a health professional. A lack of trust or willingness to seek professional help may lead boomers to either put off a decision or perhaps not fully understanding their planning options.
For those unsure where to turn to for advice on planning for long-term care, there are many resources, and a good place to start is the government's website, which provides useful information on Medicare and Medicaid. If you prefer professional guidance, consider asking your friends or family members for referrals to good financial planners or financial advisors. Consider an independent fee-only financial planner who can help you understand your options. An estate or elder care attorney can also be a good option, especially for older folks who can't get affordable long-term care insurance.
Planning for long-term care
Long-term care insurance is one option, but it's not the only path for planning. The premiums, or monthly amounts you pay for coverage, aren't cheap, especially for older retirees. But dismissing the coverage because of cost may be shortsighted. If a long-term care policy pays out benefits for one year, it would repay all the premiums you paid to date. In addition, a long-term care policy will preserve financial assets for the surviving spouse to use to support themselves.
Perhaps the best use of a long-term care policy is incorporating it into a more comprehensive plan, which is the thesis of the Bankers Life survey. Of the middle-income boomers surveyed, 88% said they "report feeling a positive impact" from having a plan in place for future care; 40% of those who said they have a plan said they worry less about the future, and 38% said they were more confident that they will have a secure retirement because they had a plan for long-term care.
Such a plan may include several facets. Speak with your family members including adult children and your close friends about the possibility of requiring help in the future, in order to gauge their ability to help if needed. If you're younger and still working, start setting aside funds for your future healthcare needs in a health savings account (HSA), if you're eligible through a high-deductible health plan (HDHP). Using the equity in a house is a last resort option should you need to downsize and free up cash for long-term care. Finally, a long-term care policy can help fill in the gaps. Since each individual's circumstances and resources are different, it's wise to consult with an experienced financial planner for help on navigating your choices.
Not having a plan leaves it up to immediate family members to step in as caretaker. This is fine if that is the shared goal, but if families don't discuss this beforehand, it can lead to stress, resentment and a strain on financial resources. Adult children have their own lives and families, and placing the responsibility for care on them may be asking too much both both personally and financially, especially if there's a long distance in the equation. Depending on a spouse for care is riddled with potential pitfalls too. If the other spouse becomes sick or passes away prematurely -- who is left to care for you? Caring for a significant other may require 24/7 care, which is a significant commitment of time and financial resources.
A long-term care insurance policy can lessen the financial stress of caring for a loved one by providing money to pay for a home healthcare aide or a long-term care facility. Suffice it to say, thinking through your options now so you and your family have time to act is a good idea. Delaying or procrastinating may mean fewer options are available in the future. If you develop a new health issue down the road, it could prevent you from getting long-term care insurance. Above all, having a plan in place provides peace of mind and you'll be better prepared if and when the need arises.
Start by honing your retirement plan to include about $138,000 for long-term care expenses, upping your own personal savings, and then add a long-term care insurance policy with affordable premiums as a safety net. You can also hire a financial planner or a financial advisor to refine your strategy, but the last thing you want to do is to be more prepared for death than life.