Your plans for retirement may include travel, home improvements, and more time spent with family. Few people enter retirement with the expectation (or even the thought) that they soon may be unable to live independently. However, this is a reality for many—around 20 percent of seniors over age 70 say that they cannot (or find it difficult to) perform many of the tasks that allow them to live independently.1 How can you plan your retirement finances to accommodate the potential cost of long-term care?
What is Long-Term Care?
The term “long-term care” can encompass everything from assisted living to skilled nursing care. It doesn’t include short-term care (like the type of care needed to recover from an injury or illness at home) or hospitalization. Around one-third of all retirees will be able to avoid long-term care costs in retirement, but 20 percent of those who do need care will need it for five years or longer.2
How Much Does Long-Term Care Cost?
Long-term care costs can largely depend on the type of care sought and the cost of living in the area. Cities and coastal areas tend to be pricier; however, this also means that there are more options available than there may be in smaller or more rural areas. In 2016, the national average cost of a private room in a nursing home was around $250 a day (or more than $91,000 per year), compared with $225 a day for a semi-private room ($82,000 per year) and $119 a day for assisted living ($43,435 per year).3 These costs can add up quickly, even for those who have already saved a substantial amount for retirement.
How Can Retirees Pay for Long-Term Care?
Although Medicaid can cover long-term care costs for those who have no income and few assets, Medicare does not cover long-term care costs—which means those who have too many assets to qualify for Medicaid but not enough to pay out of pocket can find themselves in a tough situation.
Some of the ways retirees opt to pay for long-term care include:
- An annuity. Purchasing an annuity before you require long-term care can provide a steady source of income from which to pay long-term care costs. Because annuities are such a stable source of income, some long-term care providers may agree to discount their care rate if the patient signs over the annuity to the facility.
- Selling your home. This is often only a good option if the person who needs care doesn’t have a spouse who wants to remain at home. But for many, selling what is often one’s biggest asset will yield enough cash to pay for several years of care.
- Long-term care insurance. These insurance policies can pay for some of the cost of long-term care, but because they often carry long waiting periods, it’s best to purchase a policy well before you need long-term care.
For most, it’s not necessary to save up for the worst-case scenario—$90,000 or more per year in long-term care costs for more than five years. However, by adding long-term care costs as one of the many variables in your retirement plan, you can avoid being taken by surprise later.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.
The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.
All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.
Please keep in mind that insurance companies alone determine insurability and some people may be deemed uninsurable because of health reasons, occupation, and lifestyle choices.
All guarantees and benefits of the insurance policy are subject to the claims-paying ability of the issuing insurance company. They are not backed by the broker-dealer and/or insurance agency selling the policy, or any affiliates of those entities other than the issuing company affiliates, and none makes any representations or guarantees regarding the claims-paying ability of the issuer.
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.