There have been numerous financial planning articles written about increasing longevity and the importance of putting more money away for retirement in order to avoid outliving your savings. What few of those articles also point out, however, is that longevity packs something equivalent to a financial “one-two punch.” Because along with living longer comes a much greater likelihood that a costly health event will occur – an event that without proper advance planning could rapidly exhaust your financial resources.
Many people assume that Medicare is 1) free and 2) will shield them from any significant healthcare costs once they retire. That’s simply not the case Medicare Part A is free to own but there are costs to use it. In addition, the other parts – B, C, F and Medi-Gap – all carry premiums and co-pays. In fact, according to the Employee Benefit Research Institute, a 65-year-old couple retiring today will have $264,000 in out-of-pocket medical expenses during retirement. That amount doesn’t include the potentially staggering costs associated with long-term care.1 While Medicare may cover a small portion of short-term rehabilitation costs, the lion’s share of costs associated with long-term care (e.g., nursing homes, home health care, assisted-living facilities) is not covered.
Studies have consistently told us that seven out of every ten Americans over age 65 will need some form of long-term care during their lifetime. Typically, women will need 3.7 years of long-term care while men will need 2.2 years of services. Given an average annual cost for a semi-private nursing home room in excess of $80,000 (more than $150,000 in some states), and over $150,000 for around-the-clock home health care, it’s easy to see how quickly a health crisis can consume a lifetime’s worth of retirement savings.2
What can you do to prepare
There are a range of approaches you may want to consider when it comes to funding potential future long-term care expenses – from drawing down your own assets to pay healthcare costs as they arise (self-insuring) and relying on family members, to purchasing one of several different types of insurance policies with long-term care benefits.
Traditional long-term care insurance generally provides comprehensive coverage, but it comes with annual premiums which are not guaranteed. A rise in future premiums will cause you to make a difficult choice to pay more than planned or reduce coverage at a time when you need it most. Should you end up never needing to use the coverage, you don’t get your money back. Alternatively, if you want to plan for the possibility of long-term care expenses without running the risk of forfeiting your premiums, there are a growing number of available options – from life insurance policies that offer long-term care benefit riders to fixed annuities that will pay out a multiple of your premiums if needed to reimburse long-term care expenses. These hybrid long-term care solutions pay an income-tax-free death benefit to your beneficiaries if you don’t use all your benefits, and some even offer a money-back guarantee through a return of premium feature.
Don’t wait until it’s too late
Long-term care planning is very much like retirement planning – the sooner you begin, the more options and flexibility you have, and the greater your likelihood of achieving a successful outcome. Your SunTrust advisor can assist you in estimating just how much you may need to cover out-of-pocket healthcare costs in retirement (including the costs associated with long-term care), and reviewing the various options for putting money aside to best fund your healthcare needs given your individual situation and circumstances.