Retirees: This is what it takes to be your own insurer

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Although it is frightening to think about, if you have to pay for years of long-term nursing, what would you do? Long-term care costs are already high and will continue to rise. According to Genworth, the national average annual cost for a home-health aide was over $61,000 last year. This is 12.5% more than 2020. A private room in a nursing facility costs more than $108,000. Genworth also estimates that Genworth’s 2.4% increase in insurance premiums will continue. Genworth estimates that a home health aid could cost $83,000 per year by 2031 and a private room at a nursing home will cost around $145,700 each year.

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The Long-Term Care Conundrum

Long-term care costs are not covered by Medicare. Medicaid is only available for the most vulnerable families. The high premiums for long-term insurance have made it prohibitively expensive for many.

Self-funding is an option to pay for long term care. However, this can only be done if you have enough money and plan ahead. Christine Benz, Morningstar’s director of personal finances, and author of 30-Minutes Money Solutions: A Step by Step Guide to Managing Your Financial Resources (Wiley), $19.95, says that long-term care financing is not an easy topic. The biggest mistake people make is not making a plan and not taking into consideration the risks.

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Know Your Resources

It will help you to determine how much money you should allocate to long-term health care. Benz states that it is helpful to understand where you are on the spectrum. “On one side, you have people with very little assets and who require long-term care from their family or the government. On the other hand, there are those with more assets and a greater margin of error.

Aid and Attendance can be a valuable pension benefit for veterans. It can help spouses and veterans pay for long term care. Barbara Franklin, founder and owner of Franklin & Associates, Charleston, S.C. which assists clients in planning for long-term healthcare, said that it is often overlooked. Although the program is complicated and has income limits, it can also have other requirements. But, she said, it is well worth the effort. To pay for her father-in law’s care, $1,800 per month was paid through the program. He had served in World War II.

Take control of potential costs

It is difficult to estimate long-term care costs because of all the unknown variables. Larry Pershing, CEO and founder of Optimum Retirement Planning, Chicago, says that it is difficult to estimate long-term care costs because we don’t know what everyone’s needs will be. According to the U.S. Department of Health and Human Services, less than half of people 65 and over will not require long-term paid care. A third of them will need less than two years of care. 14% will require two to four years, while 9% will require at least five years.

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Pershing suggests that people save enough money to cover at least three years’ worth of long-term care. He suggests that couples budget for five years. However, the funds should be kept in a “flexible pool” so they can be used for both of them. One person may need one year, while the other might require four. The cost of care is affected by geography. According to data from HealthView Services (a company that produces health care cost projection software), Louisiana had the lowest long term care costs at $90,000. Arkansas was more expensive at $474,000.

Keep your money in the right place

After you have estimated the long-term care expenses, add them to your retirement savings goal. You may need to adjust your target higher.

Benz suggests that long-term care expenses funds be kept in a traditional IRA even though they are taxable. Benz wrote for Morningstar about the components of self-funding long term care. You can deduct any health care expenses exceeding 7.5% of your adjusted income for 2022. Also, mandatory minimum distributions will be required later in retirement. They start at age 72 when you are more likely needing long-term care. Benz writes that you might be forced to withdraw traditional IRA funds.

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Retirees may plan to use their home as a nest egg to cover long-term care. This is risky. One, homeowners often assume that their property will continue to appreciate in value. However, the 2008 financial crisis, and the subsequent prolonged downturn in housing markets, proved this was not always true. You could find yourself in an awkward situation if housing prices fall right as you need to sell your home to fund long-term care. Pershing says, “You are putting all your eggs in one basket for funding.” Pershing adds that anyone who has seen their house’s value drop should assume no price appreciation when estimating the amount of money needed to fund long-term care.