By Andrew J. Tapparo, MSF, RICP®
When it comes to planning for your future, there is one aspect that often gets overlooked: long-term care (LTC). None of us want to think about the possibility of needing extensive care as we grow older, but the reality is that it’s a very real and significant concern for most people. The question we must ask ourselves is: Can we afford not to have an LTC plan in place? Ignoring this essential part of our financial well-being can have devastating consequences. Let’s explore why having an LTC plan is an important piece of your financial strategy and the potential risks of neglecting to put one in place.
What Is Long-Term Care and What Does it Cost?
Long-term care is needed when people are unable to do basic activities of daily living on their own. These activities include eating, bathing, using the toilet, transferring from one place in the house to another, continence, and dressing. While we take these activities for granted when we’re younger, there’s no guarantee that we’ll be able to do everything we need to for ourselves later in life.
In terms of cost, there are many factors that determine what you’ll need to pay for your long-term care needs. Most significant are your location and the types of service you will need.
Like most things in New York, prices here tend to be higher than the national average, and that’s true with long-term care. Yet depending on the type of care you need, you may not need to pay an arm and a leg. If we need long-term care, the ideal scenario for most of us is for a caregiver to come to our home and give us the help we need. In Massachusetts, the wage for those services is about $31 per hour. This can add up quickly. Let’s say your need initially is 8 hours of care each day. That would cost about $248 per day, or about $7,600 per month.
Yet if you have a more significant illness and are unable to stay at home safely, then you’ll need to either stay in an assisted living facility or a nursing home. In Massachusetts, an assisted living facility costs on average $6,695 per month and a private room in a nursing home costs $13,941. If you need to stay there for many months (or even years), the costs will be quite substantial.
Misconceptions About Long-Term Care
Before we dive into how to pay for long-term care, it’s important to clarify some misconceptions. A number of people mistakenly assume that Medicare—the health insurance program offered to people over the age of 65—pays for long-term care costs. Unfortunately, that is not the case. Medicare does not cover long-term care expenses or those costly nursing home stays.
Another significant misconception some people have is that a spouse or child will be able to take care of them. In all likelihood, your spouse, who at that time may be in their 70s, 80s, or 90s, won’t physically be able to do the necessary work to maintain your care. And while your children may be close by, they may be too busy with their own lives and responsibilities to give you the care you need. Hoping that family or friends can take care of these important functions is a risky bet I would rather you avoid.
Options to Pay for Long-Term Care
So how can you build these expenses into your retirement plan if you had planned on mitigating the costs of long-term care in the remaining years of your life? The three most common options include purchasing a long-term care insurance policy, paying for it out of pocket, or utilizing Medicaid if you qualify.
Over the last 10 years, the world of long-term care has drastically shifted as insurance companies experienced higher-than-expected claims, which caused them to scale down benefits and increase costs. One company has applied to the State of New York to raise their premiums by 250%! While they likely won’t be approved for a rate increase that high, the main takeaway for you is to evaluate your insurance options sooner rather than later so you can keep your costs down.
Not only do insurance companies keep raising premiums, but every year you wait, the older you get, which will also increase your premiums. And even more worrisome is if you get some kind of preexisting illness, you could be ineligible for insurance completely, which would eliminate this option altogether with no choice on your part.
The first type of policy to consider is a standalone or traditional long-term care insurance policy. These policies typically offer the most bang for your buck. The criticism they receive is that if you don’t use the policy, you lose the premiums you paid for. Yet just like your auto insurance, you’d rather not get into a car accident and be forced to use your coverage, right?
In these types of plans, you’re essentially purchasing a pool of money to be used for your care should you need it. Every policy is different in terms of how it’s structured, the overall policy limits, and how much money you have access to each month.
Before you purchase one, you’ll want to understand what is covered, what isn’t, and how many different care options will be in your neighborhood. In the state of New York, you can also get a tax credit of up to 20% of the premium you pay, up to $1,500 per year.
If that doesn’t sound like a good option for you, you can also consider a hybrid policy, which will combine life insurance with long-term care, or combine an annuity with long-term care. These policies cover additional risks compared to a standalone policy, but they typically don’t offer as much coverage per dollar spent. In my 25 years of experience, I’ve found that simplicity typically trumps complexity, which is a guiding principle of our work for clients in their financial plan and long-term care plan.
Protecting Assets Through Estate Planning
Imagine that you choose not to buy any type of long-term care policy, but you need significant long-term care help in the future. Not just a few thousand dollars of care, but hundreds of thousands of dollars. If you get an illness like Alzheimer’s that can last for years, in an expensive state like New York, those costs can add up quite quickly. And the money you spend on care will be money that your kids, grandkids, and favorite charities won’t receive.
But there is a potential solution in that situation. As mentioned above, you can also use Medicaid (a state and federally run program) to help cover some or all of your long-term care expenses. This type of strategy is complex and involves working with a qualified estate planning attorney, as well as your financial advisor, to put some or all your assets into a special type of trust. Once that is complete, and the required waiting periods are met, those assets won’t be listed as assets when you apply for Medicaid, which will allow you to have Medicaid pay for some—or all—of those long-term care expenses for you.
Partner With a Trusted Professional
Facing the possibility of needing long-term care can be hard to come to terms with, but it’s a reality most people will likely face. Fortunately, there are many things you can do to prepare and options available to address your long-term care needs. While it may seem overwhelming, you don’t have to navigate this journey alone. By partnering with trusted professionals, such as our team at Tapparo Capital Management, you can gain a clear understanding of your options and make informed decisions for yourself and your family. To learn more, reach out to schedule a “Get Acquainted Call” to see if we are a good fit for each other, call 978-887-1121 or email firstname.lastname@example.org.
Andrew Tapparo is a fee-only financial advisor at Tapparo Capital Management, a financial planning firm in Topsfield, MA, helping clients turn their savings into a retirement income that lasts. Inspired by the quote “Choose a job you love, and you will never work a day in your life,” Andy founded Tapparo Capital Management in 1997 with a passion for helping clients enjoy a truly worry-free and fulfilling retirement and experience financial freedom. As a Retirement Income Certified Professional (RICP®), he designs retirement strategies along with sound money management to help clients retire with confidence.
Andy holds a Bachelor of Science in Industrial Engineering from Rochester Institute of Technology in Rochester, New York, and a Master of Science in Finance from Bentley University in Waltham, Massachusetts. Specializing in retirement income planning, Andy completed a comprehensive financial industry education program at The American College of Financial Services and was awarded the Retirement Income Certified Professional® designation. He is frequently quoted in the media as a financial expert.
Andy and his wife, Susan, live in Topsfield, Massachusetts, and have two beautiful daughters. Outside of work, he is an automobile enthusiast, enjoys taking road trips, and loves the Outer Banks of North Carolina. In his spare time, he volunteers with the local high school varsity girl’s basketball team as the team statistician and runs the team’s website. He is passionate about supporting charities that serve our veterans and their families. To learn more about Andy, connect with him on LinkedIn.