Created: December 4, 2022
Modified: November 22, 2022

How to Prepare for Health Care Costs in Retirement

A lot of people don’t plan for the possibility of high healthcare costs, but it’s actually one of the most common worries Americans have- right after running out money in retirement. In addition to planning for how much income you’ll need in retirement, having a cushion set aside to cover potential health care costs is very important.

Why Preparing for Health Care Costs is so Important

According to a recent study by Fidelity, if a couple retired in 2021 at age 65, guess how much they would need to cover their health care costs? This does not include insurance; this is for out of pocket expenses. The answer, according to the study, was $300,000. Over the course of this 65-year-old couple’s lifetime, it’s going to cost them $300,000 to cover health care. Obviously, this is a big expense that needs to be planned for.

Now, before we get into the things that can hit you from a cost standpoint, the things you need to be thinking about, I want you to just think about that $300,000 number. Some people hear that and they get totally overwhelmed because they’ve just barely saved enough for retirement and they can’t possibly conceive carving out that $300,000 and setting it aside for health care costs. And if you are feeling overwhelmed, don’t hesitate to ask for help. It’s okay if you can’t achieve the ideal outcome right away–just take it one step at a time. It’s important to recognize that health care costs in retirement can be expensive and you need to have a plan for how you’re going to meet those costs financially. Tell yourself the truth about your situation and find someone who will help show you what strategies are available to reach your goals.

What Medicare Does & Does NOT Cover

Most of us are familiar with Medicare and what it entails. For those who don’t know, when you turn 65 years old and have been paying into Social Security, a portion of that money also goes to Medicare. However, many people are unaware that Medicare does not cover long-term care or nursing homes unless it is for a brief stay.

I’ll give an example. My mom fell in her home and had to go to the hospital. She hit her head pretty hard so they kept her in the hospital for three or four days and then she went to a rehab facility that was a nursing home. While she was there, Medicare paid, but they only paid because she had gone to the hospital first and it was a rehabilitation situation, not a long-term care stay. Medicare pays for some medical expenses, but not long-term care in a nursing home or at home if it’s not related to rehabilitation.

Different Types of Medicare Benefits

Now, there are different types of Medicare benefits, and this is really important. Traditional Medicare is provided by the US government, but you could also get something called a Medicare Advantage Plan. With this plan, you’re kind of wrapping up the different combinations of Medicare into one written by a private insurance company. They work with the government behind the scenes to provide benefits.

Now, this video isn’t about Medicare benefits specifically. It’s more about general health care costs and figuring out what kind of plan makes the most sense for you- whether that be a standard Medicare plan or an advantage plan. This is something that we can help you with in our office, but again, you want to know the differences. Although you might not have to pay anything out of pocket with Medicare Advantage, it may not be as good as regular Medicare. But understand, the point of this piece is Medicare will not cover long-term care costs.

The monthly costs of a long-term care facility widely differ depending on location, making it a difficult decision for anyone. On average, a couple has $750,000 saved up for retirement and their pension/Social Security can cover $150,000 annually. However, with long term care factored in (costing anywhere between $7,000 to $20,000 monthly), they would have to completely deplete their savings account within 5 years. The long term care benefit, if you go and get insurance, which we’ll talk about in a moment, it really isn’t for the person that goes into the nursing home. It’s really for the person that doesn’t go into the nursing home to make sure they’re not completely impoverished.

What is the Solution to Long-Term Care?

So what are the strategies around long term care? If you want to fund for long term care, if you want to plan for that $300,000 cost that we talked about earlier, there are a couple options that you have for long-term care to protect yourself.

You have a few insurance options to cover long-term care. Firstly, there’s the standard long-term care insurance many of us are aware of. Secondly, there’s a newer policy that is becoming increasingly popular because it offers better coverage than the older version. The old type of long term care insurance requires an expensive yearly premium – which could be anywhere from $5000 to $15,000 for a couple – with no guarantee that you’ll ever see that money again if you don’t need to make use of the policy benefits. Similar to your homeowner’s insurance or your auto insurance, if you don’t have an accident in your car, you don’t lose those auto insurance premiums. The problem is, auto insurance premiums are tiny compared to long-term care. Long term care premiums are very, very expensive. The old type of long-term care insurance policies had people questioning if they should take the risk and forgo long-term care insurance altogether in order to afford their retirement lifestyle. And that’s not a good thing. But with the new hybrid policy, you get some money back no matter what–and often with interest.

Here’s how it works. You take a deposit or you can take a stream of payments maybe over five or 10 years, and you pay into a policy. If you need long-term care, it pays back much more towards that facility then you paid in, but if you never need the long-term care and you decide you want that money back, you can cash that policy in and get all the payments you’ve put in back, maybe even with some interest. So if you change your mind later, you can get that money back, but you’ve covered the risk in the meantime. If you never go on a long-term care claim and you don’t ask for money back, at your death your family is going to get that money because it’s sort of long-term care and life insurance wrapped together. Again, we can give you the details on that, but the thing to remember is that it’s much better than the old style of long term care where you could pay in a lot of premiums and never get your money back.

Also, you could qualify if you gift enough money to go on what we call Title XIX, or Medicaid. Now, that may not sound very appealing for most of you, because in order to qualify for Title XIX or Medicaid, you’ve sort of impoverished yourself. But part of a strategy might be gifting money to your kids so that you protect some of those assets or gifting a home to your children. A good estate planning attorney will be able to protect some of those assets. So, again, it’s really important that you plan for this in the context of a full financial plan, that you understand the different planning options and so on. There’s insurance, there’s sophisticated estate planning, there are gifting strategies, but what we’re talking about is how to protect your assets against that huge 300,000 cost.

Home Care vs. Nursing Home

Choosing between home care and a nursing home can be difficult, but there are benefits to consider. With private care in your own home generally costing less money than a nursing home stay, many people say they would rather remain in their homes. My dad passed before my mom did, and he passed at a time where they were just starting to look at what’s called a retirement community, which had continuing care. Well, when my dad passed, my mom moved into a retirement community and she ended up needing full nursing home care. She only lived there for a little while and she went to full nursing home care. It would have been more ideal if she could have stayed in her own place and had that home care come in and it probably would have been a little less expensive, but she wasn’t able to do that. Either way, somebody is going to get paid. Whether you’re getting home care and somebody coming and visiting you, or whether you’re in a nursing home and you’re paying that bill to the nursing home. Again, something that’s got to be planned for. You should have a discussion with your family about home care versus nursing home.

Continuing Care Communities

Some people opt for continuing care communities when they get older, and I want to walk you through how they work. I’ll share my own experiences with my parents as an example. They had a plan in place but unfortunately, my dad passed away before it could come to fruition. My mom ended up needing to go into a nursing home as a result. But here was their original plan: had things gone differently, they would have bought into a continuing care community. They would have written a big check, maybe for $200,000, maybe $500,000, but they would have written this check to, in a sense, have a house. Now, they wouldn’t have owned this house, they would have just live there, but it would’ve felt like their house. They’d have their own beautiful condo in this retirement care community. They’d pay some rent along the way, but because they would have paid that lump sum, no matter what level of care they would have needed down the road, whether it be in-home care, full blown nursing home care, or Alzheimer’s care, they never would have to pay more money.

They wouldn’t ever have had to pay full cost for that care because they, in a sense, sort of bought that home by putting that big chunk of money down as a deposit. When they’d pass away, no matter what level of care they needed, their estate or their family would get a huge chunk of that money back. It’s almost like buying long term care insurance, but you’re not, you’re putting it in a continuing care community. You get whatever level of care you need for the rest of your life. And then when you pass away, your family gets a refund of that lump sum. They’re kind of investing that lump sum, and using the money for investing that lump sum to offset the cost of you possibly needing long term care. A lot of different details here we’ve got to think about, but it’s important. That $300,000 cost is absolutely huge and you’ve got to have a plan for long-term care. You’ve got to have plan for health insurance. You’ve got to have a plan for Medicare and how to take it in the different options there, because you want to make sure you’re not impoverished because of health care costs.

Health Care and Insurance Must be Included in your Retirement Plan

If you think again about my situation, myself and Wendy, if I have to go into a nursing home, she’s the one that pays the price. I’m in the nursing home, my lifestyle is the same whether I have a bunch of money, whether I’m on Medicaid or not, but she’s outside that nursing home and she’s worried about losing the house. Is she going to be able to travel? Is she going to be able to buy food and so on? What if my family spends all the money that we’ve set aside for retirement on my nursing home care? Health care and insurance must be taken into account when creating a financial plan; they cannot be an afterthought. Too many people get caught up in making money from investments without taking the time to assess the risks they face. One of the biggest risks is healthcare costs, especially for long-term care.

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