Christine Benz
Christine Benz, director of personal finance at Morningstar Inc., Chicago, which tracks 621,000 investment offerings. Morningstar.com
The price of long-term care (LTC) is staggeringly high and steadily increasing. Yet for some people, the best option for financing these fearsome future bills might be to pay out of pocket.
Frightening facts: The average annual cost of a private room in a nursing home recently rose above $108,000, according to a study by insurance company Genworth. As expensive as that might sound, it’s a bargain compared to what you might have to pay if you need LTC down the road—Genworth expects this annual price tag to sail past $150,000 in 10 years…and past $200,000 in 20 years.
Those figures have left many people wondering, How am I ever going to pay those prices?
Many people have decided that an LTC insurance policy is not the answer. Sales of these policies have plummeted in recent years, with consumers scared off by steep prices and the sector’s history of springing unexpected premium increases on existing policyholders.
Hybrid policies that combine elements of life insurance and LTC coverage are somewhat more popular, but still only a fraction of people in or approaching retirement have purchased these policies.
Medicaid is another option for financing LTC, but it is by no means appealing—this government program won’t pick up your LTC bills until you’ve spent down virtually all of your assets and are essentially living in poverty.
One major option remains: Save enough to pay any future LTC bills out of your own pocket. It’s a viable strategy for many Americans despite the daunting cost of care. Here’s how to make it work for you…
The conventional wisdom about self-funding future LTC expenses holds that if a retiree has a nest egg of $2 million or more, his/her savings should be sufficient to support this strategy.
But that’s not necessarily true—if you enter retirement with a nest egg of
$2 million but spend $100,000 a year, you could easily end up without enough assets to pay LTC bills when the time comes.
For self-funding LTC to be a viable option: You must have a nest egg of seven figures or more…and be able to pay your bills through age 90…and still have a surplus that’s comfortably into six figures to pay for LTC. A retirement calculator, such as Vanguard’s Retirement Nest Egg calculator (Vanguard.com/nesteggcalculator), can help with this math.
How much should you set aside? For most retirees, it isn’t feasible to prepare for LTC worst-case scenarios—a diagnosis of dementia that leads to a decade-plus nursing home stay could easily produce bills of $1 million to
$2 million or more…and a married couple would have to plan for the possibility that both spouses could require such extended care.
More realistic savings target: The amount needed to pay for the average nursing home stay—for men, the average is 2.2 years…for women, it is 3.7 years. Nursing home costs, currently just north of $100,000 per year, are climbing fast, so it’s reasonable for an individual to set aside $300,000 for LTC expenses…and for a couple to target twice that amount.
That still sounds like a lot of money to set aside for LTC that might never be needed, so don’t look at this money as only for LTC costs. It serves three worthy purposes—paying LTC costs if you do in fact require a nursing home stay…a hedge against longevity risk, so you won’t have to live in poverty if you outlive your other retirement savings…and/or if the money isn’t needed for either of the possibilities above, a legacy for your heirs or your favorite charity.
Warning: The data in this article is largely based on national averages, which might not fit your circumstances. When you are deciding how much to save for LTC, factor in the following…
Where you live—the cost of LTC is dramatically higher in expensive coastal regions than in many middle-America locales. Examples: The current annual cost of a private room in a nursing home in Missouri is $71,175…but $182,044 in Connecticut.
Family health history and personal health history. If you and/or your spouse have been diagnosed with dementia or have a family history of dementia, significantly more LTC savings are warranted. In fact, a family history of dementia could be a strong motivation to apply for LTC insurance or a hybrid policy that includes LTC coverage rather than planning to pay for LTC out of pocket. But keep in mind: Someone with a dementia diagnosis probably would not qualify for LTC insurance…and even someone with a family history of dementia may be limited in the type of coverage he can buy.
Of course, if your LTC savings target is based on the average length of a nursing home stay, there’s a reasonable chance that your LTC bills will exceed those savings. Have an emergency backup plan in mind in case that occurs…
Tap your home equity. This could be done by selling your home…taking out a reverse mortgage…or taking out a home-equity line of credit. Many retirees don’t want to take equity out of their homes or sell their homes, but emergency backup plans aren’t about what we want—they’re about making do in difficult circumstances.
Spend down assets to qualify for Medicaid or the US Department of Veterans Affairs “Aid and Attendance” benefits. These government programs pay LTC bills only for applicants who have extremely limited assets. That makes them unappealing but still worth considering in emergency situations.
Family-provided care. No one wants to be a burden to a spouse or descendants, but seeking familial assistance can dramatically reduce the number of years spent paying for LTC. Spouses are major providers of care and often the first line of defense for individuals with LTC needs. Someone who is diagnosed with dementia might live with loved ones for as long as possible before moving into a nursing home, for example. Such arrangements are extremely common—83% of the assistance provided to older adults in the US comes from family members, friends and/or other unpaid caregivers, according to the Alzheimer’s Association.
If you decide to self-fund LTC, put money earmarked for those future bills into an account other than your retirement funds to reduce the odds that the money will be misspent.
Assets earmarked to pay future LTC costs should be invested fairly aggressively even during the early years of retirement. The typical nursing home stay doesn’t begin until around age 80, so someone in his late 60s probably won’t need the money for more than a decade—and that’s usually sufficient time to ride out any stock market fluctuations. These assets might be slowly transitioned into a more conservative allocation comparable to that of a retiree’s other retirement savings as he approaches his mid-70s.
Best vehicle for these savings: A traditional IRA. That might seem counterintuitive—other savings vehicles such as Roth IRAs and Health Savings Accounts (HSAs) offer tax-free withdrawals, a wonderful benefit that traditional IRAs lack. But that isn’t a massive advantage when it comes to paying for LTC costs. Reason: Most LTC expenses qualify as health-care expenses…and health-care expenses that exceed 7.5% of adjusted gross income are tax-deductible. Thus, any taxes generated by withdrawing money from a traditional IRA to pay LTC bills likely will be mostly offset by the resulting deduction. Factor in that pretax dollars are used to fund a traditional IRA, and it’s an excellent savings vehicle for LTC costs.
