What you need to know to protect your retirement savings
The Costs of Long Term Care
by Gary Foreman
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Could the cost of long term medical care deplete your retirement savings? That's the fear of many retirees. And, given that there's a better than 50/50 chance that you'll need long term care at some point, it's a valid concern.
We wanted to learn more about long term care and how to pay for it. To help us understand the issue we contacted Angela Dorsey, CFP®, MBA and a Principal of Dorsey Wealth Management. Ms. Dorsey is a fee only financial planner in Torrance, California specializing in women and their families.
Q: Most people aren't aware of the potential costs of long term care and are surprised by how much they could spend. How big a bill should retirees prepare for when they're doing retirement financial planning?
Ms. Dorsey: Costs can vary greatly depending on where you live and the type of care you need. However a 65-year-old couple can expect a total $220,000 out of pocket healthcare cost in 20 years of retirement.
Q: It's also a common assumption that "others will need long term care, but I won't." Do the stats support or refute that assumption?
Ms. Dorsey: Many people find it easy to ignore needing long term care because of more immediate issues they are facing, such as purchasing a home, saving for retirement, and putting kids through college. However, according to the U.S. Department of Health and Human Services, 70% of Americans who reach age 65 will eventually need long term care.
Q: Could you explain "self-funding" and when that's a sensible answer for retirees planning for potential long term care expenses?
Ms. Dorsey: Self-funding means you feel confident you can pay for long term expenses yourself if need be. The self-funders don't buy LTC insurance. These individuals have plenty of money or other assets to pay for their LTC expenses. They have done retirement projections and have enough money to fund their retirement without running out of money so they feel confident that they can pay for health care expenses without jeopardizing their retirement for both spouses if married. Self-funding can be a sound strategy if an individual or couple feels they have the assets to fund long term care without running out of money in retirement.
Q: Some people choose to supplement a self-funding long term care plan. What does that look like?
Ms. Dorsey: If you want to self-fund but you don't want to bare the entire burden, you can purchase a long term care policy to help. You may be willing to pay for the early costs of LTC insurance from assets and family assistance, but you want help if care is needed for a long time. In this situation, you may want to consider a LTC insurance policy with a long elimination period of for example 365 days. This way, assets and family assistance can help through the first year, then after that the long term care insurance kicks in.
One of the most important ingredients for a comfortable retirement is to be debt free when you retire.
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Q: What insurance options are there for funding long term care?
Ms. Dorsey: One of the most common fears is that a person buys a long term care policy and then never uses it. Therefore, they feel that money was "wasted." You commonly don't hear this concern with homeowners or auto insurance. However one way to make sure you are guaranteed some financial value from purchasing long term care insurance is to purchase life insurance with a health care rider. This way, if you need long term care, you can pull money from your life insurance. If you never need this money for health care, then your beneficiary receives the life insurance proceeds upon your death. If you do need the money for health care, it is there for you, and your heirs will receive whatever money is remaining. It is a good way to "hedge your bets."
Q: What happens to retirees who can't afford to self-fund or buy long-term care insurance?
Ms. Dorsey: Well, there are a few options for retirees who can't afford to self-fund or purchase long term care insurance. If they are a home owner, they can consider a Reverse Mortgage Line of Credit. Just be sure you get references to find a reputable lender who has reasonable fees. You can also shop around for care. If you are flexible, depending on where you live, care can be cheaper in another state. Also, the type of care you receive can reduce the cost. For example, sharing a room at a senior living facility cuts the cost. Lastly, family assistance may be an option. Again, if you are flexible, there are ways to reduce the costs.
Reviewed May 2017
Angela Dorsey, CFP®, MBA, Principal of Dorsey Wealth Management, is a fee only financial planner in Torrance, California specializing in Women and their Families. Comprehensive financial planning services include Investment Management, Retirement Planning, Tax Planning, Estate Planning, and Insurance Planning. You can visit her website at DorseyWealth.com for more information about her practice.
Gary Foreman is a former financial planner and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.
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