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Long-Term Care: Ready or Not, Here it Comes

What happens when I can't take care of myself anymore?

By Bill Harris, RMA

For some, retirement means "where will we play today's round of golf?" For others, it could mean, "do I pay for my meds or my rent?" In either case, a few concerns touch every retiree. And the topic of long-term care is one of them, at least subconsciously. The question that causes more than a few sleepless nights is, "What happens when I can't take care of myself anymore?"

William Harris

Bill Harris

Publicly, it's another story. Far too many will brush off the need for long-term care, whether in a nursing home or assisted living. The refrain is often "Don't worry, it won't happen to me." Yet 70 percent of those now 65 or older will develop needs before they die. (Source: Kiplinger)

Part of that 70 percent will be people in facilities for a short period of rehab after the growing number of knee or hip replacements. But the remainder is made up of people unable to perform two or more of the six "ADLs" – activities of daily living. ADLs are used to measure someone's fundamental skills needed to live independently. They include eating, bathing and hygiene, dressing, grooming, mobility, and toileting and continence.

In short, ADLs are considered predictors of someone's use of paid home care, need for alternative living arrangements, and admission to nursing homes or hospitalization.

According to the U.S. Department of Health and Human Services (HHS), 70 percent may need long-term care, but only 48 percent will pay for it. (The others rely on family and unpaid caregivers.) Only 24 percent receive more than two years of paid long-term care, and 15 percent will spend more than two years in a nursing home. Women need on average 3.7 years of long-term care, and men 2.2 years.

But even if only 24 percent receive more than two years of long-term care, if that's not factored into retirement plans, the cost can be devastating to even the best-laid plans.

Genworth Financial has tracked the cost of long-term services for nearly 20 years. It reports the national median price for a private room in a nursing home facility to be over $105,000 per year, but with a wide geographic variation. (A room ranges from $189 per day in Missouri to $1,196 per day in Alaska.) And costs are not expected to decline any time soon. Upward pressure will continue as baby boomers age, and prices are projected to double in the next 20 years.

HHS's Office of the Assistant Secretary for Planning and Evaluation (ASPE) has published its "Projections of Risk of Needing Long-Term Services and Supports at Ages 65 and Older." This table shows the relative likelihood that you'll need specific services at different ages, which may be helpful as you assess your need to prepare for long-term care costs in your planning.

Population Age 65 and Older (in thousands) Using LTSS in 2020, by Age

The Cost of Long-Term Care

Americans are living longer. The Social Security Administration website has a tool called a "longevity visualizer." It looks at different ages and tells you how long you might live. For people who are 65 today, 52% of men will reach age 85, 31% will reach 90, and 13% will reach 95. For women, 62% will reach age 85, 41% will reach 90, and 20% will reach 95.

Unfortunately, that extra longevity means people are living with chronic health issues. As a result, it's easy to underestimate the long-term care costs they might face, even if they have planned for them.

Genworth publishes an annual Cost of Care Survey with considerable state-by-state detail. At the national level, the average costs in the U.S. are:

  • In-home homemaker services: $53,768
  • In-home health aide: $54,912 
  • Community adult day care: $19,240 
  • Community assisted living facility: $51,600 
  • Nursing home semi-private room: $93,075 
  • Nursing home private room: $105,850

Those are the costs you could be facing if you, your spouse, or your parents need long-term care.

If you become part of the percentage that does need long-term care for a substantial period, do you know how you will pay for it? To help offset or mitigate that drain on retirement savings, let's look at four available alternatives.

Long-Term Care Insurance

In the past, many of these costs were covered through long-term care insurance. Costs were spread over large risk pools, so premiums were affordable, and the coverage was generous. However, the industry's structure has changed considerably over the past 20 years for two reasons: falling interest rates (that affected the funding part) and rising health costs. As a result, many insurers were forced to abandon the business. In the 1990s, 100 insurers sold the policies. Now, fewer than 15 do.

The companies that stayed in the sector raised premiums dramatically while limiting benefits. For example, they added caps on daily payments, lengthened the elimination period before a policy kicked in, and limited both the term and the maximum amount the policy would pay.

Premiums do start lower if you buy your policy at a younger age, but you could be paying premiums for decades before ever needing the care. And, if you die before needing to call on the policy, all your paid-in premiums would be lost.

The solution to the "use it or lose it" frustration was for the industry to create a hybrid long-term care insurance policy. It combines long-term care coverage with life insurance benefits. These policies can be purchased with a one-time, lump-sum payment or on a payment plan, but premiums can be two or three times those of traditional policies. However, if you die before you use the long-term care coverage, your designated beneficiaries will receive the death benefit.

On the other hand, if you need long-term care coverage – whether at home or in a facility – the policy will pay out as a traditional one would. The payout will reflect your chosen daily benefit, elimination period, term and total cap. But the death benefit will be lowered or eliminated altogether, depending on how much you use.

Traditional and hybrid policies alike have elimination periods. Those are typically 90 days long, but some extend to 180 days. Unfortunately, that means you will have to pay for the first 90 to 180 days of care.

What does that mean? If you have a private room in a nursing home, for example, on average, you will need $26,500 to $53,000 in available cash.

Veterans’ Benefits

The Department of Veterans Affairs (VA) is not known for being an easy bureaucracy to navigate. In fact, it recommends contacting the VA directly to understand what is available to you. And to get around the aggressive scammers who are ready to interject themselves in the dialog between you and the VA for a fee, it recommends using VA-recognized organizations or individuals known as Veterans Service Organizations (VSOs).

But the VA has some valuable programs for those who qualify. And once you're approved, benefits are paid retroactively to the date of your application.

Suppose you qualify to receive a VA pension (as opposed to military retirement pay) and are mostly confined to home because of a permanent disability. In that case, the VA has a Housebound program that might benefit you. It can increase your veteran's pension income and allow for credit for unreimbursed medical expenses.

An alternative VA benefit that might be available to you is the Aid and Attendance (A&A) program. (You aren't allowed to receive A&A and Homebound together.) Wartime veterans and their surviving spouses aged 65 or older may be eligible for this tax-free benefit to help offset the cost of long-term care. Again, the qualifier is if you need help with two or more activities of daily living.

You must meet four criteria to qualify for A&A: military service (falling between dates), an asset test (that measures your financial need), medical need, and an income test.

A single veteran's benefit can exceed $23,000 per year in 2021; two married veterans who both qualify for A&A could receive nearly $37,000.

The A&A benefit, like Social Security, is paid directly by the Department of Treasury and can be used for in-home care, adult daycare, senior-living care, memory care, assisted living communities, and private-pay nursing homes.

It's important to remember that this is in addition to the other services provided to veterans by the VA.

Self-Funding

If long-term care becomes necessary for you or your spouse and you haven't made plans to cover the cost, you will likely start by making a list of all available financial resources. On that list will be personal savings, pensions, IRAs, 401(k)s, investments, and any assets you can borrow against, including the equity in your home to support a home equity loan or a reverse mortgage.

Your list might even extend to whole life policies you can borrow against, surrender for cash or monetize through a life settlement. Or critical-care riders on annuities or insurance policies that allow most of the death benefit to be distributed to cover the costs of long-term care.

The urgency to raise funds depends on where you are along the care continuum. For example, are you just starting to need custodial care, which the family can cover? Do you need outside services for custodial or skilled care? Or do you need immediate care in a facility?

But if long-term care has been part of your retirement planning process, you may have already gone through the calculation of whether it makes more sense to self-fund or pay for long-term care insurance. To make that decision, you first had to understand four things: the likelihood of needing care, where you might receive that care (home or elsewhere), the likely length of the stay, and what the potential costs are in your area.

This assessment will be subjective, of course, because of all the assumptions you will have to make, especially about the degree of need, the source of care, and its duration.

Medicare versus Medicaid

Most people assume that Medicare picks up the cost of long-term care, but it doesn't. It will cover short-term care following a hospitalization, but nothing beyond that. Medicare pays partially or fully for 100 days of care if you show improvement in a rehabilitation facility. Medicare's care is health-related and not care-related.

However, for those who cannot pay for care for themselves, the federal government will pick up the cost of those services, but it will be through the Medicaid system. And it is only available if you have limited income and limited countable assets. Unfortunately, some people's assets may be too low to self-fund but too significant for them ever to qualify for Medicaid.

For those who might qualify, few people understand how those assets are calculated. The term used is "spend down," which means how much of certain assets you must spend before qualifying for assistance. Spend-down rules may vary from state to state, so it is worth researching them in detail.

If Medicaid is the likely solution for long-term care needs, advance planning is invaluable. Assets can be transferred or protected with trusts, for example, but in most cases, you will have a 5-year "look-back" period during which the transfers of assets are disallowed. However, transfers made within the five years may be partially allowed; for example, 80 percent may be allowed if transacted four years ago.

The person going into care undergoes one financial calculation and is left with minimal assets. The remaining spouse undergoes another more generous calculation. But if the second spouse also seeks Medicaid support later, a new 5-year look-back period may be triggered. Thus, the entire qualification process would benefit from careful pre-planning with the help of an advisor, estate planner, or elder law attorney.

One last key factor is "Medicaid recovery" or "Medicaid payback." In the spend-down process, you are allowed to retain a home, a car, and other assets, including for your spouse. Once both you and your spouse die, Medicaid can present the accumulated bill it paid for your (and possibly your spouse's) care as a first lien against the beneficiaries' inherited assets. However, if there is no inheritance, the invoice disappears.

Wrapping Up

The cost of long-term care is onerous enough to merit being part of any discussion about retirement plans. What are the downsides? If you are prepared, the worst thing that could happen is having the resources when needed.

The best thing would be to enjoy the peace of mind of knowing you are prepared, never need the care and have a structure in place that leaves those resources to your loved ones.

About the author: Bill Harris, RMA®, CFP®

Bill Harris is a Retirement Management Advisor® (RMA®), a CERTIFIED FINANCIAL PLANNER™ practitioner (CFP®), a Master Elite Ed Slott Advisor, and author of ‘Inheriting Your Spouse’s IRA’. He is President of WH Cornerstone Investments, a financial advisory firm located in Kingston, MA. Learn more at https://whcornerstone.com/.