By Jason Van Steenwyk
You’ve worked hard your whole life. You’ve scrimped and saved, and diligently contributed to your 401(k) plan at work, or your 403(b) plan, and you have an IRA as well, that you’ve been contributing to for years. You’re doing all the right things, and voila… at the end of your working years, you have a nest egg saved up that you have every reasonable expectation of generating a few thousand dollars a month from to support you and your spouse in your golden years.
Would that it always happened that way. Alas, it doesn’t.
Here are the facts: This year, according to the U.S. Department of Health and Human Services, some 9 million American senior citizens will require long-term care in some way, shape or form. And with the baby-boomer population entering their 70s and 80s, that number is going to balloon. By 2020, the federal government expects the number of people requiring long term care assistance to balloon to 12 million – and keep growing from there.
The costs of long term care can tear a gaping hole in your retirement plan. According to the 2012 Genworth survey of long term care costs, the median monthly cost of a single-occupancy, one-bedroom assisted living facility is $3,300, and growing at a rate of 5.71 percent per year over the past five years.
The median cost of a semiprivate room in a skilled nursing facility is $200 per day – growing at 4.5 percent per year over the last five years. That equates to $73,000 per year: Easily enough to consume the entirety of a pension or retirement income. And that’s just for one spouse.
Your chances of needing long term care at some point during your life are four in ten, or 40 percent. If you have a spouse, the chances of either one of you requiring long term care are well over 50 percent.
Long term care is a huge risk, then. The financial consequences of a lengthy chronic disability requiring assistance are devastating to a retirement portfolio. And chances are that either you or one of your neighbors is eventually going to have to confront the issue head on.
I’ve got news for you. The government isn’t going to come to your rescue. Yes, Medicaid does provide some help for some people with their long term care needs. But that help is limited to those who have already spent their own resources down to the poverty level. Except for some exempt assets such as home equity, a modest car, a burial plot and a burial life insurance policy, and a modest subsistence-level nest-egg left over for the spouse not requiring care (specific exemptions vary by state), you’re going to have to spend yourself down to your last $1,700 or $2,000 in the world before you can even qualify for Medicaid. If you have a pension that gives you more than that much per month, the nursing home or Medicaid program will take all of it. And once you and your spouse have passed on, the Medicaid Asset Recovery Program will seize your home, unless your heirs pay back everything the Medicaid system spent on you.
Medicare? No dice. Medicare only covers 100 days of care, and even then only pursuant to a qualifying hospitalization, lasting at least three days. Medicare is not designed to provide any benefits for slow-onset, chronic declines in your health that do not require acute hospitalization.
What’s more, only the first 20 days of long term care is free. After that, you’ll have to pay coinsurance of $128 per day. So even with Medicare, you’re still paying the bulk of long term care costs yourself. And after 100 days of Medicare, you’re on your own.
Benefits for seniors requiring long term care are not going to improve significantly any time soon. Assuming the Supreme Court upholds the Patient Protection and Affordable Care Act (in doubt as of the time of this writing), Congress will have stripped Medicare of about $500 billion over the first ten years of the program to fund it. So Medicare will be smaller than we originally counted on – yet will need to serve more people as the baby boom generation enters its peak years for medical care consumption.
Competition for scarce resources will be keen.
Medicaid programs are also notoriously underfunded. The states are laboring under massive under-funded pension programs themselves, and some states, such as California and Illinois, are careening toward bankruptcy.
The Department of Veterans Affairs does run a handful of veterans homes across the country. But like Medicaid, the VA programs are means-tested. You don’t get to show up when you need care just because you are an honorably discharged veteran. The VA homes primarily serve only the indigent with service-related disabilities. If you’re not already living in poverty, and have a service-connected disability, the VA isn’t going to come riding to your rescue. You can, however, read an overview of VA long term care services and eligibility criteria here.
At the very top of the income and wealth strata, you’re going to be ok. If you can afford to write a check for close to $90,000 per year per spouse or more, your heirs may be a little disappointed in the long run, but you’ll be able to pay for your long-term care needs.
At the very bottom of the strata, if you have a critical long term care need, brought on by Alzheimer’s disease, strokes, diabetes, cancer, or anything else, you’re probably going into Medicaid and having your assets stripped from you no matter what you do.
For those of us in the middle, though, your care will have to be paid for through a combination of private savings and pension income, family assistance, and long-term care insurance. The less you have saved up, and the less family assistance you can rely on to help keep you out of a facility for as long as possible, the more critical your need for long term care insurance will be.
In its purest form, long term care insurance, or LTCi, in insurance trade parlance, pays a maximum daily benefit, usually between $50 and $300 or so, to offset the costs of care. Specific policies vary, but typical options include coverage for in-home care, a one-time cash benefit to buy durable medical equipment or modify a home to accommodate a disability, an inflation protection rider of some sort, coverage for housekeeping assistance, assisted living facilities, adult day care facilities, nursing home care and hospice care. The standard trigger to qualify for benefits is the loss of the ability to perform at least two basic activities of daily living (ADLs). ADLs include transferring, dressing, bathing, continence, toileting and eating. LTCi plans typically also pay benefits if the insured can do all the ADLs, but has a significant cognitive impairment such as dementia.