Last Updated: April 13, 2009
No matter where you turn, it's becoming inevitable. You will need resources to pay for all your health care costs in retirement. The average 65-year old couple retiring in 2009 would need about $240,000 to cover the cost of medical care in retirement, according to a recent Fidelity Investment report. What's worse, the estimate does not include the cost of long-term health care. Meanwhile, the Center for Retirement Research at Boston College reports that the retirement landscape is shifting dramatically and that the outlook for retiring Baby Boomers and Generation Xers is far less optimistic than for current retirees.
"Nearly 45 percent of households are "at risk" of not having enough to maintain their living standards in retirement," according to the Center's The National Retirement Risk Index (NRRI). What's worse, percent of households "at risk" increases to 64 percent when health care costs and long-term health care insurance are factored into the Index.
"Because the costs of long-term care insurance and other health expenditures are rising and the income system is contracting, these latest findings raise major concerns about the retirement security of baby boomers and succeeding generations," Alicia H. Munnell, director of the Center for Retirement Research at Boston College, said in a release.
"Managing the cost of long-term care is becoming an essential part of financial and retirement planning," FPA member, Peter Golato, senior vice president for Nationwide, said in a release. "Fortunately, financial professionals have a myriad of financial products available that can be customized as part of a strategy to help them meet their client's financial goals."
It's important to note that Medicare and ordinary health care insurance are not designed to cover long-term care expenses. According to the American Council of Life Insurers, 48 percent of Americans are paying out of pocket, 41 percent qualify for Medicaid, 8 percent are getting temporary coverage provided by Medicare and only 3 percent are paying with private long-term care insurance.
So what are some strategies to pay for long-term health care? According to the Center for Retirement Research: "For those in the bottom third of the wealth distribution (those with assets not including their home of less than $20,000), the most reasonable strategy (to pay for long-term care costs) is to rely on Medicaid. Medicaid is, according to Kaiser Family Foundation, the nation's largest health care coverage program. It covers 59 million low-income individuals, including children and families, people with disabilities and the elderly who are also covered by Medicare. Medicaid is also the dominant source of the country's long-term care financing." Learn more about Medicaid.
Those in the top third of the wealth distribution – those with assets not including their homes of $200,000 or more – may be able to self-insure, but more likely they will need to either purchase long-term care insurance or rely on tapping their housing equity to pay for long-term care, according to the Center for Retirement Research. Various Web sites can provide information about the costs associated with long-term care, including home health aides, nursing homes, and assisted living facilities. Those include MetLife and Genworth. Determining the cost of long-term health care insurance can, however, be a bit of a challenge. Much of it depends on the specifics of the policy, your age and other factors. According to the 2008 Long-Term Care Insurance Price Index published by the American Association for Long-Term Care Insurance, a 55-year-old individual considering long-term care insurance protection can expect to pay $709 per year for a base level of protection if they are married or $1,095 if they are single. Learn more about the American Association for Long-Term Care Insurance.
In general, Shawn Britt, director of advanced sales for Nationwide Financial Services, Inc., said the public is not properly educated on the need for long-term care (LTC) or the options available to them. So it would be worth your time learning more about this insurance. "The cost can be enormous and self-insuring, even for the affluent, could wipe out significant assets," Britt said.
In addition to traditional, stand-alone long-term care insurance products, Golato also said there are hybrid products. "For a reasonable cost, a long-term care rider can be added to certain life insurance policies, which allows for the death benefit to be collected to help pay for long-term care costs," he said in a release. "Any unused death benefit will be paid to the heirs."
Golato also noted that there's a little-known incentive in the Pension Protection Act of 2006 that is worth investigating. "Starting Jan. 1, 2010, this legislation allows for the tax-free 1035 exchange from life insurance, annuities or endowment policies to a stand-alone long-term care policy," he said in a release. "If using these funds to pay for a long-term care policy, there will be no tax due on the gain from these assets."
Meanwhile, those in the middle third of the wealth distribution – those who have assets not including their home that range from $22,000 to about $200,000 – might benefit from long-term care insurance, but may find the price tag too steep, suggesting that they will plan to fall back on Medicaid if their assets are exhausted, the Center for Retirement Research reported.
What else do you need to know about long-term care costs?
For starters, there's plenty you can do to reduce the odds of needing long-term care, such as assisted living or nursing homes. According to FPA member Golato, living a healthly life today– a proper diet, regular exercise and check-ups– can greatly reduce medical costs in retirement. Taking advantage of health and wellness benefits offered by your employer can also be of great benefit.
In addition, saving more and working longer may substantially improve the outlook, the Center for Retirement Research said in its report. Learn more about the Center's National Retirement Risk Index.
Also, it's important for you to discuss the potential need for long-term care with a financial professional, who can help guide you toward a product that best suits you specific needs and concerns, Britt said. "Options are confusing, rules are changing, costs are becoming less affordable and coverage is getting harder to obtain," she said. "Financial, retirement and estate planning should include a serious look at long-term care needs." Please visit FPA's PlannerSearch® to find a CERTIFIED FINANCIAL PLANNER™ professional that can help you with your unique financial needs.