Despite the high costs of long-term health care, future retirees are not saving enough
Even the well-to-do are unprepared. Almost 70 percent of people turning age 65 will need long-term care at some point in their lives, according to the U.S. Department of Health and Human Services. Yet, few people are planning or saving for those expenses.
According to a survey conducted by Nationwide Financial and Harris Polls, high-income and high-asset workers older than 50 both underestimate the cost of long-term care and are unlikely to plan for it. About 57 percent said they had a plan for financing their retirement, but admit they did not have a plan for long-term care expenses.
“When people talk about retirement, they talk about 401(k) and mutual funds, but people are reluctant to talk about long-term care,” said John Carter, chief operating officer and president of Nationwide Retirement Plans.
People don’t want to think about an infirmed old age, and instead prefer to plan for all of the things they will do in early retirement like golf and travel, he said. But “the more we can connect (long-term care) to the overall retirement discussion, the more holistically they can plan.”
The annual cost of long-term care is estimated to reach $265,000 per year in 2030, up from about $80,000 per year now, according to Nationwide. Forbes magazine once described spiraling long-term care costs as the “wild card that could destroy your retirement.”
This is, of course, on top of already abysmal retirement savings rates. About one-third of working people aged 55 to 64 have no retirement savings at all, according to the National Institute on Retirement Security. Another third have savings equal to only about one year’s pay. Financial services firm Aon Hewitt estimates 65-year-olds should have savings equal to about 11 times their annual salary at retirement in order to meet needs.
“We’re good consumers, not great savers,” said Brad Huffman, certified financial planner with Future Finances in Worthington. “Many Americans are just worried about how they will pay their bills today. They don’t have anything left to save for the future. And, those who haven’t experienced long-term care don’t want to think about it. Even if they are saving for retirement, most people don’t have adequate resources to address (long-term care), because the solutions are expensive.”
But really, who can blame the boomers? Their parents have been the first generation to live “really long lives,” said Jesse Slome, executive director of the American Association for Long Term Care Insurance, “so this is really the first generation that is having to deal with it. Most people do not think about long-term care planning. It’s new, it’s different.”
But lack of planning “is definitely an issue,” Slome said.
There are essentially three options for retirees when it comes to paying for long-term care, Slome said. First, turn their family into caregivers, which is what happens in most cases.
Second, spend your savings on care, and when the money runs out, rely on a government program for help. Or third, buy long-term care insurance.
Only about 11 percent of people aged 55 and older have long-term care insurance, which generally covers in-home care as well as nursing home care. Most people fall into the first category. About 78 percent of elderly adults receiving care at home are getting it from a family member, according to the Georgetown University Long Term Care Financing Project.
The lack of insurance coverage is due in part to it being “a cost-intensive product. You must pay the premiums for your entire life (to keep the policy active), and the company can raise the premiums any time,” Huffman said. “I’ve seen a number of carriers raise premiums 25 to 75 percent over the last few years because they realized they underpriced it. The insurers needed to balance what they were bringing in with what they were paying out.”
For instance, a policy for a 55-year-old in excellent health that pays up to $3,000 a month for up to five years of care cost $991 per year in 2007, and $1,788.50 per year in 2012, according to the American Association for Long Term Care Insurance.
Boomers are reluctant to buy it because there is no guarantee they will need it, the price is high, the policies are complicated, and there are “legitimate fears as boomers need the care that the insurance companies won’t be around,” Huffman said.
Insurers can also be picky. “Sometimes, even if you have the money, they will not sell you a policy.”
Then there is just plain optimism. “If you’re in a room with 10 people, and statistically you know seven of them will need long-term care, you never see yourself as one of the ones who will need it,” Carter said. “People also fail to plan for their own longevity. They don’t think they’ll make it to 85 or 100, but more and more people do.”
Some also mistakenly assume that Medicare will cover any long-term care costs, Carter said.
Medicare will pay for 100 days or fewer of skilled nursing home care or limited in-home care, according to the U.S. Department of Health and Human Services. Medicaid pays for nursing home care, but not in-home care, and only for those who with low incomes and limited assets.
You also don’t have any control over where you end up. You have to go where there is an available bed, even if it’s far from family, Slome said. Medicaid covers two-thirds of the costs of long-term care, according to the federal commission on long-term care.
There is no one-size solution. Those with assets of $500,000 or less “may need most of that just to survive in retirement. They will likely have to rely on Medicaid,” Huffman said.
Those with more resources can use specialized longevity and care cost calculators to determine how much they might need for long-term care, and then determine if they can carve that money out of their retirement savings, Huffman said.
The widespread lack of preparation for both retirement costs and long-term care costs will likely have far-reaching implications for retirees, their families and society.
“With the growth of the elderly population, and the fact people aren’t planning for long-term care or even for retirement is a terrible concern,” said Cindy Farson, executive director of the Central Ohio Area Agency on Aging. About 85 percent of the people they work with are being cared for by family, and at great emotional and financial cost.
“We as a society don’t abandon our parents, but the caregivers sure do need help and that need is only going to be worse,” she said. “There is a big question now of who is going to care for the elderly in the future, because there is a looming shortage of caregivers for the aging population, even for those who have money.
“Something has to be done,” she said, it just isn’t clear what. Neither the government nor individuals “seem to have a solution to how to pay for long-term care. We can’t let people go without care, so we better start coming to grips with the need. There is a huge portion of the population that haven’t saved.”
Denise Trowbridge is a freelance writer.