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Retirement

6 Steps for Smart Long-Term-Care Planning

How to get your arms around the costs and resources available.

6 Steps for Smart Long-Term Care Planning

Key Takeaways

  • About 70% of people need some form of long-term care. You will need to do some thinking about the type of care that you would ideally like to receive and assess the costs.
  • Your next step should be to evaluate available resources and figure out which sort of bucket that you might fall into for long-term-care planning. These buckets include government-provided care through Medicaid, self-funding, and a long-term-care insurance product.
  • Retirees can take some comfort in thinking about their home equity as a part of their long-term-care equation.

Susan Dziubinski: Hi, I’m Susan Dziubinski from Morningstar. One of the most vexing aspects of aging in the U.S. is figuring out how to pay for long-term care if you should need it. Joining me to discuss how to create a plan for covering potential long-term-care costs is Christine Benz. Christine is Morningstar’s director of personal finance and retirement planning.

Thanks for being here today, Christine.

Christine Benz: Hi, Susan. It’s great to see you.

What Is Long-Term Care?

Dziubinski: Let’s start out with a bit of stage-setting. Let’s talk about what falls under the umbrella of long-term care. What is it?

Benz: It’s nonmedical care that helps us with our what are called activities of daily living. So, things like bathing, feeding ourselves, showering, toileting, all of those things that everyone needs to do to get through the day. If you need help with those activities, that’s considered long-term care. And the crucial thing is that this type of care is not automatically provided by Medicare or by your supplemental policy. If you want to insure against it, you typically need to go out and purchase some sort of separate form of coverage.

6-Step Action Plan

Dziubinski: So, you’ve outlined what you call a six-step action plan for long-term care. And you also say that the first step is often the most difficult, and that’s trying to gauge how likely you are to actually need long-term care. So, tell us a little bit about the statistics around long-term care. Who needs it? How often people need it? And how can we use those statistics to help us assess our own personal situations?

Benz: It’s super tricky because when we look at the raw data, about 70% of people need some form of long-term care. Some of it may come through a Medicare-provided setting. The common example is if someone needs to go to rehab after a qualifying hospital stay, that will be covered by Medicare, and then a lot of care is just provided informally by adult children and neighbors and people who are helping out. So, 70% will need long-term care. About half of people will need paid long-term care of some kind. They’ll need paid assistance. And then, you see that women are much more likely to need paid long-term care than men. We live longer than men. And the duration of long-term-care needs on average for women is longer than men. So, for men who have a long-term-care need, it’s in the realm of 2.2 years. With women, it’s almost double that length, so about 3.7 years for women.

Assessing the Costs

Dziubinski: The next step in your plan is to assess the costs. How do you begin to get your arms around what the potential cost might be?

Benz: Right. I think you do want to do some thinking about the type of care that you would ideally like to receive. Most people would probably say I want home-based care delivered in my home versus in some sort of long-term-care setting. So, take a look at the costs of that type of care. With the home-based care, unfortunately, the costs have been escalating really dramatically. I was looking at Genworth’s most recent data: $62,000 a year for a home-care helper for 40-plus hours a week, so not even around-the-clock care, and the rate of inflation in that type of care is in the neighborhood of 12.5% over the past year. And we know we’ve got a caregiver shortage in this country. That’s what’s driving those higher costs for home-based care. So, around $60,000 for that home-based care.

And then, if you look at care provided in a long-term-care setting, in a nursing home, these days, a private room in a long-term-care facility, the national average is over $100,000. It’s been in that ballpark for a while. We’ve seen a little less inflation in that space. But you can use those as starting points. And then, you’d also want to marry that with the durations that we were talking about. If you’re a woman, I think you might want to think about, say, four years’ worth of that care and plan accordingly.

Three Buckets of Long-Term Care Planning

Dziubinski: Now next, you say, your next step should be to evaluate available resources and figure out which sort of bucket—you say there are three buckets—that you might fall into. Walk us through that.

Benz: Right. I’m putting everything in buckets all the time. The three main buckets would be—if your resources are very limited and if you believe that your portfolio will barely survive and provide you with your regular spending needs, you probably will be reliant on government-provided care through Medicaid. And indeed, Medicaid, the government is the largest payer of long-term-care expenses by far in the U.S. So, most people who need long-term care, who need paid long-term care do go that route. So, that would be the case for folks with limited resources.

If you have a lot of resources, so if your spending plan for your retirement assets will provide you with everything that you need and then some, you’re probably a good candidate for self-funding long-term care. And I know we’re going to talk a little bit about how to set aside a long-term care fund. But you would want to make sure that you had ample assets for supplying your own living expenses and then you’d want to have the excess.

And then, if you’re in the middle, you’re a good candidate for exploring some sort of an insurance product, some sort of a long-term-care insurance product. Whether that might be pure long-term care, so just a stand-alone long-term-care insurance policy or increasingly, we’re seeing these hybrid life insurance/long-term-care insurance policies, which offer people a little bit of optionality that I like, which is one reason that these policies have become popular. But they’re certainly more opaque and complicated, And I would say, if you decide you want to go down that road, you should get some objective help because it can be super complicated to untangle what is the right type of product.

Government-Provided Care

Dziubinski: Well, let’s unpack some of these. So, for those who are likely to be covered by a government-provided care, what are some things they need to be aware of?

Benz: Well, a key one is that there are these very stringent limitations around the amount of income that you can have and around the amount of assets that you can have. And that’s less important, I would say, for single people, but it becomes more significant for people who are married, and oftentimes, you’ve got a well spouse who does not need long-term care as well as the one who needs long-term care. So, you basically have to exhaust much of your resources in order to qualify for long-term care. So, that’s an important consideration. It’s something you should know and potentially think about and plan for.

And then, the other big thing to know about Medicaid-provided long-term care is just that there are limitations around where you can receive that care. So, increasingly, we’re seeing Medicaid experiment with home-based care. So, that may be an avenue for some folks. But oftentimes, you will be pretty limited in terms of the setting where you can receive care. Not all facilities that offer long-term care will have availability for patients who are covered by Medicaid. So, that’s an important consideration as well.

Dziubinski: Now, let’s talk a little bit about the people who might fall into that self-funding group. How should they be thinking about how to set aside these dollars for the potential for long-term-care needs?

Benz: Right. I think it goes back to type of care that you’re interested in. Ballpark the duration of care; if you’re a married couple, you’d want to think about potentially doubling that care level to cover you for both of your lifetimes. And then, I really like the idea of segregating those assets if you’ve decided we need $250,000 in this long-term-care fund. I would segregate it from my spendable assets. You don’t physically have to have a separate investment account. But I would segregate it and plan to earmark it for long-term care. If you’re a young retiree, if you’re just starting out on retirement, you know that the data suggests that people don’t have a long-term-care need typically until close to the end of their lives. So, you might invest that portfolio somewhat aggressively. Where and which account type also comes into play. Generally speaking, long-term-care spending tends to lead to big tax deductions. And so, it’s oftentimes a good idea to pull your spending needs for long-term care from accounts that have heavy tax consequences to pull from them. So, that would be like your traditional tax-deferred IRA would be a good silo for your long-term-care assets.

What Role Could Home Equity Play?

Dziubinski: What role could home equity play here, Christine?

Benz: I think this is a really underdiscussed piece of the long-term-care equation. And my hope is that retirees will take some comfort in thinking about their home equity to the extent that they have it as a potential piece of this puzzle, because single folks certainly would likely sell their home if they needed to move into some sort of a long-term-care facility. If they wanted to stay put, they could potentially tap a reverse mortgage or a home equity line of credit. Same goes for married couples. If one needs to move out to go into a long-term-care setting, they too could look to a reverse mortgage or a heloc [home equity line of credit] in that instance. So, I think it’s a nice backup plan for people who do have home equity that they do not have plans for already in their retirement. I think it can help perhaps allay their worries about this problem.

Long-Term-Care Insurance

Dziubinski: Christine, let’s talk a little bit about that last cohort, the people who should perhaps consider insurance, what should they do? What should they be thinking about and looking out for?

Benz: Right. First of all, get some help from an objective observer. A fee-only financial planner, I think, would be a really great resource in this instance. Also understand timing for insurance. Many people do not qualify for insurance. So, if you wait too long, you may have some physically disqualifying condition that will limit either your ability to purchase insurance or the amount of benefits that you’re able to purchase. So, understand the role that age plays in this. When we look at the data on who gets rejected for pure long-term-care insurance, we see that as people move up in the age bands, they tend to get rejected more. So, exploring it earlier is better. I think thinking in the period of the mid-50s is a good starting point for that exploration.

And then, one other point I would make is, for people who have a whole life policy, sort of a permanent life insurance policy, we are talking about those hybrid products earlier, explore with your planner, whoever you’re using to help you explore this area, explore the idea of what’s called a 1035 exchange, which is the opportunity to switch into a different type of life insurance product. Maybe you had that sort of pure life insurance product, you could potentially use this 1035 exchange, which is a tax-free exchange to get into one of the life insurance policies with a long-term-care rider. So, explore that if you have a life insurance policy that you don’t necessarily have a good need for at this life stage. And that’s often the case as people move into their older adult years, their kids aren’t around, they don’t necessarily have dependents, they don’t need that pure life insurance. The long-term-care need is a more pressing risk factor.

Dziubinski: Well, Christine, thank you for your time and your insights into this difficult but important topic. We appreciate it.

Benz: Thank you so much, Susan.

Dziubinski: I’m Susan Dziubinski with Morningstar. Thanks for tuning in.

Watch “Can You Retire Soon?” for more from Christine Benz.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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