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This Retirement Expense Could Cost You $172,000, and You're Probably Not Ready for It

By Maurie Backman – Updated Oct 21, 2020 at 1:24PM

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Warning: You could be in for a financial shock later in life.

When we think about the things we'll spend money on during retirement, a few common items may come to mind: housing, transportation, food, entertainment, and Medicare premiums. But there's one major expense a frightening number of seniors don't plan for -- one that could cause them untold financial hardships later in life.

We're talking about long-term care, and it's more common than you might think. An older American turning 65 today has an almost 70% chance of needing long-term care in the future, the U.S. Department of Health and Human Services says. And that care can be extensive. Men, for example, need an average of 2.2 years of long-term care, while women need 3.7 on average.

Unfortunately, long-term care is not covered by Medicare. It's also an expense that costs an average of $172,000 per person on a lifetime basis, according to PWC, and if you'd rather not scramble to come up with that cash or put that burden on your loved ones, then you'll need a plan to cover it.

Woman in scrubs helping an older man out of bed

Image source: Getty Images.

How to pay for long-term care

You have several options when it comes to covering the astounding cost of long-term care. First, you can always pad your retirement savings in the hopes that they will suffice. The upside of boosting your IRA or 401(k) contributions is that you'll have the flexibility to use that money for any purpose come retirement. If you end up being among the 30% of seniors who don't need long-term care, you'll get to spend your savings elsewhere, but that way, the money will at least be there.

Another option is to max out a health savings account (HSA) from year to year while you're still working. HSA funds never expire, and you can use that money to pay for late-in-life care. That said, not everyone is eligible to fund an HSA. To qualify, you must be enrolled in a high-deductible health insurance plan, and the definition of that changes every year.

Your third option, and one very much worth considering, is to invest in a long-term care insurance policy. That way, if you do wind up needing expensive care, you'll have a policy kick in to defray that cost. The ideal time to apply for long-term care is in your mid-50s. At that age, you're not paying premiums for too many years, but you also stand a good chance of not only getting approved for a policy, but also snagging a discount on premiums based on your health.

The average annual long-term care insurance premium for a 55-year-old couple today is $3,050, according to the American Association for Long-Term Care Insurance. But your premium costs will depend on your age and health at the time of your application. The good news, though, is that if you have money socked away in an HSA, you can use it to cover the cost of those premiums.

One final option you might consider is a hybrid life insurance and long-term care insurance plan. These plans pay a smaller death benefit than traditional life insurance, but do give you some long-term care coverage to fall back on.

No matter how you choose to cover long-term care, make sure you have a plan well in advance of retirement. The last thing you need is a $172,000 expense that wrecks your finances and gives your family one more thing to stress about during your later years.

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