It’s daunting to consider, but if something tragic happens and you need years of long-term care, how would you pay for it? The costs of long-term care are already exorbitant and will only get worse. Last year, the national median cost of a home health aide was more than $61,000, a 12.5% increase from 2020, while a private room in a nursing home cost more than $108,000, an uptick of 2.4%. By 2031, a home health aid could cost about $83,000 a year, and a private room in a nursing home is expected to be roughly $145,700 annually.1
Medicare largely doesn’t cover long-term care costs, and Medicaid only kicks in for the poorest families. As for long-term care insurance, the soaring premiums have become unaffordable for many.
That leaves self-funding to pay for long-term care, an option that can only work if you plan ahead and set aside enough money.
Understand your resources
Knowing what to expect in terms of government assistance, help from family and the benefits of a long-term care policy, if you have one, will give you a clearer picture of how much money to allocate for long-term care.
People with low income and few assets might be able to qualify for Medicaid, which can help cover the costs of assisted living services and in-home care. Each state sets its own eligibility requirements, though in 2022 an individual generally needs to have income of less than $2,523 a month and no more than $2,000 in assets to qualify for Medicaid.2
If you expect family members to help care for you, have those discussions in advance. Don’t assume your children or other relatives will be willing or able to fill this role or that all care can be done for free. You should outline the services family members will provide and their compensation in a personal care agreement.
If you’re fortunate enough to have long-term care insurance, find out what it covers and if you’ll need to supplement that coverage using savings. Policies can be structured differently to pay for varying amounts of care.
Get a handle on potential costs
Because of all the unknown variables, estimating long-term care costs is tricky. You don’t know what your needs are going to be, and the range of what you could need to huge. Less than half of those age 65 and older will not need paid long-term care, while roughly a third will require less than two years of paid care. But 14% will need two to four years of care, and roughly 9% will need at least five years.3
Keep the money in the right place
Once you’ve estimated your long-term care costs, factor them into your retirement savings goal, which may need to be adjusted higher as a result.
Many people suggest keeping funds mean for long-term care expenses in a traditional IRA, even though these withdrawals are taxable. The taxes, though, may be offset by the deduction for medical expenses that you will likely qualify for if you need extensive long-term care.
It makes less sense to earmark funds for long-term care in a Roth IRA. These withdrawals aren’t taxable, so you probably won’t get the benefit of deducting medical expenses. Plus, Roth accounts are more advantageous to leave to heirs who won’t be taxed on the withdrawal.
Some retirees plan on using their home as a nest egg to pay for long-term care, which is risky. For one thing, many homeowners assume their property will always appreciate in value, but the 2008 financial crisis and the prolonged downturn in the housing market that followed proved that this isn’t always the case.
The costs of long-term care are already exorbitant and will only get worse. It is recommended that you consult with a financial professional to better understand your options.