Healthcare expenses are the largest financial wildcard of later-life retirement spending. We simply don't know how much we may need to spend. On average, a 65-year-old couple will face out-of-pocket healthcare spending needs of more than $250,000 during the rest of their lives. But this is only an average. The couple's bill could easily be $500,000 or even $1 million.
If healthcare is the big spending unknown in retirement, then the expense for long-term care is often the largest slice of this scary pie chart. Here, too, we simply don't know if we'll need long-term care or how extensive and costly it may be.
The "big" sobering statistic about long-term care is that 70 percent of us will require an extended period of long-term care at some point in our lives. That figure is so large you'd think all of us would include a big hunk of care expenses in our retirement spending plans. But, of course, we don't. Setting aside money for even the things we're sure we'll need is hard enough. Building a big rainy-day healthcare fund is simply out of the question for most of us.
Well, if we can't fund our own long-term care needs, what about Medicare? As it turns out, Medicare may fund a short-term caregiving stay in a hospital or other care facility. But it doesn't pay for long-term care, a fact that seems to regularly surprise seniors when they are asked about their future healthcare spending.
What about long-term care insurance? By way of full disclosure, my wife and I each have long-term care insurance. And I once worked for a major seller of long-term care insurance. We're lucky enough to be able to afford the fairly stiff premiums. And, no, I don't much like the idea of forking over well in excess of $100,000 during my life for a product I hope I will never need. But I like this prospect much better than the alternatives. As is the case with my auto and homeowner's insurance, my long-term care policy is "I can sleep at night" insurance. It's also a sign of mutual caring and respect among partners.
Most people do not buy long-term care insurance. Maybe it's too expensive. Maybe they think they'll never need it or, mistakenly, that Medicare covers long-term care expenses. Or they never really think about it at all. Whatever the cause, they don't have an emergency healthcare fund or insurance. As a result, Medicaid is the nation's default provider of long-term care. Sadly, most people qualify for Medicaid only after they've had to spend nearly all of their money on long-term care and exhausted their wealth.
To help you better plan for your own possible long-term care needs, it may be instructive to dig into that scary 70 percent probability statistic. What is it really saying? John Migliaccio, director of research at the MetLife Mature Market Institute, scoured industry research to come up with some answers. Jesse Slome, executive director of the American Association for Long-Term Care Insurance, publishes a long-term care fact book. The 2012-13 edition of the association's sourcebook is very helpful.
Slome says he does not use the 70 percent figure. "This number," he recently wrote in a white paper, is "based on a government study conducted years ago, [and] may be accurate but the definition for 'long-term care' is quite encompassing and not relevant to a discussion regarding long term care insurance utilization."
The National Clearinghouse for Long-Term Care Information, which is part of the U.S. Department of Health and Human Services, uses the 70 percent figure, Migliaccio says. It also says the average period of care required by someone who is now 65 will be three years during the rest of his or her life—2.2 years for men and 3.7 years for women.
Within these averages, nearly 60 percent of seniors will need unpaid home care averaging a year in duration. Slightly more than 40 percent will need paid care at home that will last less than a year. These categories overlap, resulting in about 65 percent of seniors needing home care of any type, for an average of two years.
For care in a nursing home or other assisted care facility, about 35 percent of seniors will need to be in a nursing home, for an average stay of about a year. Roughly 13 percent will be in other assisted living facilities for less than a year, on average. The combined likelihood of institutional care is that 37 percent of seniors will need it for a year.
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Keep in mind that the conditions that trigger the need for long-term care are quite specific. They relate to what are called ADLs, or "activities of daily living." There are six ADLs: eating, bathing, dressing, toileting, transferring (walking), and continence. The need for help with two or three ADLs is a triggering event for long-term care.
Genworth Financial and MetLife both do extensive cost-of-care studies each year, and they include details on caregiving costs in hundreds of metro areas throughout the country. By plugging the average likelihood of care into this care information, you can develop a general sense of your lifetime exposure to long-term care expenses.
If you do not think you'll be able to afford these possible expenses, your next step should be to consider private long-term care expenses. Tomorrow's Best Life will walk you through that decision.