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Three Perilous Long-Term Care Mistakes That Can Wreck Your Retirement

Good to Know

“What you don’t know can’t hurt you.”

That common but deeply flawed bit of conventional wisdom is based upon a comment made almost 450 years ago. It was flawed in the 1500s and it remains flawed today. As but one insight, any retirement plan that ignores long-term care risk could be a retirement plan in peril.

Long-term care (LTC) is assistance
with a patient’s physical or emotional needs for an extended period of time. LTC services may be provided in the patient’s home, an assisted living facility or a nursing home.

The purpose of this article is to bring this peril into sharp relief so you can face and manage it. What kind of financial peril are we talking about here? Average annual costs can range from over $100,000 to about $20,000 as illustrated in the chart below.

Skilled care, frequently called “skilled medical care,” is the highest level of care within a long-term nursing facility. This level of care averages over $100,000 per year nationally.

Even basic custodial care in an assisted living care facility can cost about $40,000 or more annually.

But wait a minute – how about in-home day care? That’s not expensive, right? Professional care during the day for 5 days/week can cost $20,000 or more annually. But this strategy only works if there’s no need for skilled medical care and there are family members willing and able to serve on nights and weekends.

BTW, exactly what does “custodial care” mean? Custodial care is assistance with a person’s activities of daily living (ADLs). ADLs include activities1 such as walking, dressing, eating, bathing, maintaining continence and “toileting” (who knew that a porcelain bathroom fixture could morph into a verb?).

Now that we’ve illustrated the potential costs, let’s consider those costs in light of our savings or retirement plan.

How many retirement plans could withstand an annual drain of $20,000 to $100,000? LTC may be needed for only a few months or 6 years or more. The average LTC stay is about 3 years.

We promised you three LTC mistakes and here they are:

Three Perilous Long-Term Care Mistakes

Ignore the risk

Assume Medicare will pay

Assume Medicaid will pay

Mistake # 1: Ignore the risk

The reasoning here could be that you’ll probably never need LTC. That’s a tempting and common assumption but are the probabilities on your side?

Before we get to the statistics, consider the demographics. For example, diseases that would have killed us 100 years ago are now routinely survivable. As witness to that demographic, average life expectancy in the U.S. increased by an astounding three decades over the last century.

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True or False

Pneumonia, tuberculosis or enteritis caused 1 of every 3 deaths in the U.S.A. in the early 1900s but caused less than 1 of every 20 deaths by the 1990’s.

The statement is true. As medical science continues to improve life expectancies, today's "baby-boomers" and their parents are living longer. That’s the good news.

The bad news is that they are not always living in good health. Those longer life expectancies are often accompanied by a need for extended custodial care and, in some cases, extended skilled medical care.

Now we’re ready to reveal the stats. How likely are you to need LTC services? According to the American Society on Aging, 7 of every 10 Americans age 65 and older will need some form of long-term care during their lives. What is your strategy to manage LTC risk? Let’s say you’re willing to either ignore the risk or bet you’ll be among the 3 in 10 who will not need long-term care.

  • But here’s an interesting question – do you use that same approach with other risks?
  • For example, let’s assume your home mortgage is fully paid off. Even though there’s no mortgage company to require it, would you insure your home against loss or damage from fire?
  • Most, including the author, would respond with an emphatic “of course!” But consider this - only about 3 in every 10,000 homes are destroyed by fire annually. That’s a .03% chance your home will be destroyed by fire this year; so, does it make sense to insure that 0.03% risk but ignore a 70% LTC risk?

Mistake # 2 – Medicare will pay

medicare-logo

Medicare does NOT cover custodial care.

Medicare is a federal health insurance program for those over age 65 and others. Medicare insurance pays for hospital charges, physician fees and prescription drugs.2

But what about skilled nursing care? You may have read that Medicare pays for up to 100 days of skilled nursing care. That is absolutely true but watch out – Medicare does not pay for purely custodial care!

Mistake # 3 – Medicaid will pay

Medicaid is a joint federal/state health insurance program that covers the impoverished, the elderly, children, and other groups.

Medicaid provides long-term care coverage for qualifying patients. But the challenge for most Americans is in qualifying for Medicaid.

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You must check ALL of the boxes below (and more) to qualify.

  • Annual income for a one-person household cannot exceed $16,753 in 2019.3
  • Liquid financial assets cannot exceed $2,000 to $16,0004 on the application date.
  • The patient cannot have transferred significant liquid financial assets out of his or her name to anyone else (or to an irrevocable trust) within 5 years of the application date.

Let’s take a full step back and look at the big picture. How can you can manage LTC risk? There are three basic approaches.

 

  1. Self-insure

    Clients with sufficient wealth to comfortably pay up to $500,000 or more out-of-pocket for an extended long-term care need could consider self-insurance.

    How much wealth is needed? That’s an easy question – enough wealth so that the potential loss of $500,000 or more to long-term care costs would not materially affect net worth or lifestyle.

    As a point of fact, about 1 in every 100 Americans has a net worth of $10,000,000 or more, but even wealthy Americans often buy long-term care insurance

  2. Rely on Medicaid

    About 1 of every 10 Americans live near or below the federal income poverty level and have virtually no investment assets. Medicaid long-term care insurance is designed for these Americans.

    Specifically, Medicaid long-term care insurance is generally available only to those who have:

    • Income of 138% of the federal poverty level or less, and
    • Liquid investment assets of $2,000 or less.4

  3. Buy long-term care insurance

    If you’re like about 89% of all Americans, you’re too wealthy to qualify for Medicaid but not wealthy enough to self-insure. Consider buying long-term care insurance if you’re one of the members of the “89% club.”

bottom-line-img An extended long-term care need can cost more than the average middle-class home. Yet far too many of us ignore this risk. Left unmanaged, this risk can wreck even a sound retirement plan.
Disclaimer
This blog discusses important mistakes in managing long-term care risk. The information presented herein is provided purely for educational purposes; it is not meant to and should not be used to provide financial advice to specific individuals. Consult your professional financial advisor with specific experience in this practice

1 This is not a complete list of the activities of daily living (ADLs). Generally, an LTC policy’s benefit will begin whenever the patient cannot perform a requisite number of ADLs.

2 Medicare Part A generally pays for hospital charges, inpatient prescriptions drugs, durable medical equipment and more. Medicare Part B pays physician fees. If the patient also has Medicare Part C or Part D, outpatient prescription drugs are covered.

3 This assumes the state has expanded their Medicaid programs. Not all states have done so. The income limit is lower in states that have not expanded Medicaid programs. The dollar amount listed assumes a household of 1. The limit increases with increases in the number of people in the household.

4 This amount varies from $2,000 (many states) to as high as about $16,000 in one high cost-of-living state. Assets such as 401(k) Plan accounts, IRAs, checking/savings/money market accounts, CDs, stocks and bonds are generally considered liquid assets. Note - 401(k) Plan accounts and IRAs that are currently making distributions to the applicant are NOT counted as a liquid asset.