Let’s face it: Getting old is a fact of life. For most, the time will come when we must slow down. We will have to assume a more careful pace, use extra caution when getting around, and accept help when we may not want it.
While this may be difficult for us to envision, the fact is that most Americans will need some sort of care in their advanced age. And this care, as you might predict, can be expensive. When establishing a plan for the future, it is essential that we consider the potential cost of the care we may need in our old age—and that we explore ways to fund those expenses.
Are You Prepared? Approximately 70 percent of people now turning 65 will need long-term care at some point in their lives. Despite this overwhelming statistic, a recent survey revealed that only 22 percent of respondents believe they will actually need such care. In fact, less than one-third of Americans over 50 have begun to save for this expense.
Even those who are planning for their care are underestimating the cost. According to a survey by Lincoln Financial Group, 73 percent of respondents said that they had not saved enough. Even those respondents who worked with a financial planner were unprepared, with 40 percent claiming they never even discussed long-term care planning with their advisor.
News articles and financial experts extol the need to prepare for this probable expense—which can easily exceed hundreds of thousands of dollars—but their call remains largely unheeded. So why are most Americans so ill-prepared?
Wade Pfau, professor of retirement income at The American College and a well-known retirement research expert, says it could be blind optimism, or simply something people don’t want to think about.
“It’s a very uncertain expense,” Pfau says. “People don’t want to think about losing their independence and they may be confident that it’s something that’s not going to happen to them.”
Joe Caldwell, director of long-term services and supports policy at the National Council on Aging, says he thinks most people are uninformed about their options when it comes to funding long-term care. “There’s definitely a need for more public education,” he says. “There’s a lack of awareness about long-term care and how it’s funded. Surveys show that people assume that Medicare or private insurance will cover it, and they don’t realize that’s untrue until they reach a point where they need it.”
Facility Living Versus In-Home Care Long-term care refers to the need for assistance completing daily living activities—such as dressing, bathing or eating—for a period longer than 100 days. People in need of such care typically choose between moving to a nursing home or an assisted living facility and arranging for a family member or aide to provide in-home care.
According to the Center for Retirement Research at Boston College, 44 percent of men and 58 percent of women over age 65 will require nursing home care at some point in their advanced age. Still, in-home care appears to be the more popular route, with more than 70 percent of seniors opting to enlist the help of a family member.
In-home care with the assistance of a family member typically lasts about two years, with most caregivers providing an average of 20 of assistance a week. Surveys indicate that family members are often saddled with extra expenses to provide this care, with nearly half reporting that they spending an average of $5,000 a year out-of-pocket to help their loved one.
The Cost of Care There are various methods one can use to fund the costs of long-term care, including the purchase of long-term care insurance, Medicaid, assistance from family and self-funding through savings, the liquidation of personal assets or the use of a reverse mortgage. 8
The value of each option is different for everyone, but it’s essential that all possibilities be considered when putting a plan in place to fund the expense of a person’s needs as they age. The potential cost of long-term care is huge and continues to increase year over year. Some attribute this to the fact that even though more facilities have opened, the demand continues to increase.
“Generally, long-term care costs increase faster than inflation, and I would expect that to continue due to the demographics,” Pfau says. “There’s going to be more need for care and there’s going to be fewer people who can provide that care.”
Genworth Financial, a large provider of long-term care insurance, publishes an annual Cost of Care Survey that sheds light on the expenses one can expect. With an average of $45,750 a year for a home health aide to $80,300 a year for a shared room in a nursing home, the numbers are staggering.
Long-Term Care Insurance To help fund the expense, some purchase long-term care insurance. But this option is not without its drawbacks. Some people may not qualify due to existing health conditions, and there is a risk that premiums could rise, the cost of care would exceed the plan’s benefits, or that certain expenses would not be covered.
Pfau says the industry’s tarnished reputation doesn’t help matters. “For a long time, there was turmoil in the long-term care insurance industry, and it kind of had a bad reputation to deal with,” Pfau says, adding that some insurance providers increased premiums and reduced benefits on their policyholders. “Unfortunately, a lot of people dropped their coverage shortly before they actually would be able to use it.”
As a result, Pfau says most people don’t pursue this option. “It’s not all that common. Probably only about 10 percent of the population has long-term care insurance.”
Caldwell says the expense is a major deterrent. “Long-term care insurance is really not affordable for most people, especially middle-class people who are trying to save for retirement. The average premium for long-term care insurance is about $2,200 a year, so that’s a pretty significant cost. So I think affordability is an issue for people.”
Complexity is another issue, Caldwell says. “Even if people want to buy it, it’s really complicated to understand. People looking to buy a policy can get overwhelmed; they don’t know what to believe and what to look for. We need to simplify the market so people can understand what they are buying a little bit more.”
Medicaid Medicaid is another source of funding, but it too comes with drawbacks. While it might be the most widely used option for funding long-term care, Medicaid requires its recipients to be nearly destitute to qualify, making it a true option of last resort.
“To get on Medicaid, you basically have to have divested pretty much all of your assets, except for the home if you’re living in it. You have to have assets worth less than about $2,000,” Caldwell says, adding that more people will apply for Medicaid in the coming decades, which will put a significant drain on state budgets that fund the program. “I think it’s going to be harder and harder to get Medicaid services.”
The quality of care for Medicaid recipients is also a concern for some. Caldwell points out that home- and community-based services can be difficult for Medicaid recipients to receive. “They are optional in states, so sometimes there are waiting lists,” he says. “Even if you qualify for Medicaid, it’s really to get home- and community-based services.”
Pfau points out that Medicaid plans pay less for care services, which can cause a disparity in quality between those on Medicaid and those who self-fund. “I really worry about the quality of Medicaid services. People who can pay for their own care are probably going to receive much better care than people who are forced onto Medicaid.”
Self-Funding and Reverse Mortgages Finally, self-funding is another potential solution for some. This option requires an individual to have substantial savings or divestible assets, or financial assistance from family. For some, a reverse mortgage could be a smart solution by allowing borrowers to establish a line of credit that they could draw upon when needed to fund care expenses. Over time, the unused line of credit will increase, and borrowers will only accumulate interest in what they have used.
Pfau says this could be a great option for some. “Reverse mortgages are interesting because the line of credit can provide that sort of contingency cushion that could be used to fund long-term care expenses. It’s almost like a form of insurance to have that growing line of credit that would be available for something like long-term care and that can help support in-home care and avoid moving to a nursing home,” he says.
Pfau also says a reverse mortgage’s ability to help borrowers age in place is a major bonus. “It can help you receive care in the home and can reduce the need to have to move to a nursing home or some other form of institutional living. A reverse mortgage could also fund home renovations that make it easier to stay in the home longer,” he says. “It’s definitely worth thinking about for people moving into retirement.”
Caldwell also sees the potential. “It is one of the biggest assets seniors have, and tapping into that equity to be able to use your home to stay at home could definitely be an option.”
Despite the obvious benefits, many people—consumers and financial professionals alike—are unaware or unwilling to consider reverse mortgages. Pfau notices this resistance, but says he expects things to change down the road.
“It seems like there’s so much inertia. People who did their due diligence 10 or 15 years ago are very slow to revisit their past positions,” he says. “But the media is increasingly reporting positively about reverse mortgages, so there may be more clients asking their advisors about it. Slowly but surely, advisors will get updated knowledge about how the reverse mortgage world has changed.”
“By requiring a financial assessment and updating the rules about non-borrowing spouses, the government has been doing a lot to reduce some of the concerns that existed about reverse mortgages in the past. From the perspective of the financial planning profession, over the last couple of years there’s been an increasing number of research articles showing how integrating reverse mortgages into a responsible strategy can really improve retirement incomes,” Pfau says. “I’m predicting that it’s going to be the next hot area that financial planners are going to be interested in. Social Security has really been the focus for the past couple of years.”
The Importance of Planning When planning for retirement, it’s important to establish a contingency plan should you require long-term care. Whether you choose to enlist the help of family or apply for Medicaid, it’s helpful to be aware of the options available to you and how they could impact your finances and the quality of your care.
According to Pfau, the expense could be overwhelming. “It’s one of the big potential shocks to a retirement plan. A long-term care expense could, at the very extreme, exceed a million dollars, so that’s definitely something that needs to be taken into consideration.”
Caldwell agrees. “When it happens, the costs are so expensive. It can easily drain all your savings and retirement if you’re unprepared.”