If you eat right and exercise (most of the time), and inherit healthy genes, you may enjoy a long and healthy retirement with no healthcare expenses other than those incurred for annual check-ups and general preventative care. On the other hand, if you are prone to illness, your medical expenses could take a big bite out of your retirement savings and adversely affect the financial security of your retirement. Even if you inherit healthy genes and live a healthy lifestyle, you may not want to roll the dice on what your health status will be during your retirement, as the cost of long-term care could wipe out your savings. Even if you're doing your best to look after your health, you shouldn't fail to prepare for the worst. Read on to learn how you can get started.
What is long-term care?
The U.S. Department of Health and Human Services defines long-term care as "a variety of services that include medical and non-medical care to people who have a chronic illness or disability. Long-term care helps meet health or personal needs. Most long-term care is to assist people with support services such as activities of daily living like dressing, bathing and using the bathroom." It goes on to explain that "long-term care can be provided at home, in the community, in assisted living or in nursing homes." (For related reading, see A New Approach To Long-Term Care Insurance and Taking The Surprise Out Of Long-Term Care.)
Don't think you'll need long term care? Statistics from the Department of Health and Human Services suggest otherwise. They state that by 2020, 12 million older Americans will need long-term care. Individuals who reach age 65 have a 40% chance of entering a nursing home, and about 10% of the people who enter a nursing home will stay there for at least five years.
Life expectancies have increased; if your ancestors lived long and healthy lives, it could mean that you are likely to live even longer. This increases the likelihood that you will need long-term care, as the need for it increases the longer you live past age 65.
Will you be able to afford long-term care?
The national average cost for a nursing home runs into the thousands of dollars per month. This could be more or less, depending on the state in which you live. With the average length of stay for current residents in nursing homes being 892 days, and 272 days for discharged residents, the total costs can add up to a significant amount. Further, many patients require post-acute institutional skilled or custodial care, which could add hundreds of thousands of dollars to the bill.
You may think Medicare and Medicaid will pay for your long-term care, but you must meet eligibility requirements for Medicaid. In order to qualify, you must have virtually no assets. Furthermore, there is a cap on the amount covered, and Medicare does not cover all expenses for medical care and long-term care. Figure 1 shows the amounts you would be required to pay.(For related reading, see Medicare: Defining The Lines.)
Medicare provides hospital insurance for in-patient care and certain follow-up care. It also pays for medical insurance coverage for physician services that are not covered under the hospital insurance. The medical portion of the insurance is available at a premium and is optional. Even if you are covered under Medicare, it will not cover all of your expenses. For example, blood transfusions, home health services, prescription drugs, hospital stays and skilled nursing may come with additional charges. For additional information on Medicare, see SSA Publication No. 05-10043.
Medicaid is a joint federal and state program that helps to pay for medical costs incurred by individuals with limited income and resources. The eligibility and premium requirements are determined under State law, and generally require that you have no assets and fall within a low-income category. For individual state requirements, visit the Center for Medicare and Medicaid Services of the U.S. Department of Health and Human Services. (To learn more, see Medicaid Versus LTC Insurance.)
Defraying Medical Expenses
Amounts saved in retirement nest eggs are usually intended to finance an individual's retirement years, and/or to be left as an inheritance for loved ones. Not having the proper resources to cover long-term care costs can result in a nest egg being used to pay for medical expenses, post-acute institutional care such as that which is provided at a skilled nursing facility, home-health care and other health-related expenses not covered under insurance. However, there are steps that can be taken to prevent this scenario. These include:
- Check your state law to determine the Medicaid coverage requirements.
- Check your state law to determine whether your retirement account is protected or if you would be required to liquidate your retirement account and hand it over to the state under its Medicaid eligibility requirements.
- Visit the Social Security Administration's website to review the Medicare rules and determine the best time for you to sign up.
- Consider purchasing long-term care insurance if it is determined that it would be a good product for you. But before you do, check to ensure that the provider is reputable and reliable. (See Long-Term Care Insurance: Who Needs It?)
- If you are eligible, make contributions to a health savings account (HSA). One of the attractive features of an HSA is that the balance need not be used for medical expenses each year, but can be left to accumulate and add to your retirement nest egg. (For further reading, check out Fighting The High Costs Of Healthcare.)
- Talk to an elder law attorney in your area regarding the above, and about any and all things related to health coverage during your retirement years. These attorneys usually specialize in the area of elder care, including providing guidance on eligibility, insurance requirements and determining the steps you can take to protect your assets. If you cannot afford an attorney, visit LawHelp.org to determine whether you are eligible for free legal aid.
These steps should be taken before the need for care arises. Work with your attorney to design your action plan and to establish a timeline for putting it in effect.
Poor health could result in a poor retirement, financially speaking, because a lack of financial resources could adversely affect you in many ways. You can avoid this scenario by taking the right steps before it is too late. Failure to implement a plan that is suitable for your financial profile could result in your receiving medical and post-acute institutional care that is of a lesser quality than you really need or would find acceptable. It may even mean that you are not able to receive some of these services due to lack of financial resources. Make sure you enjoy your retirement by planning early and sticking to your timeline. While being ill is not a goal on most of our lists, having the resources to treat medical problems if they arise should be.
RetirementAdjusting to retirement can be challenging, but when it happens unexpectedly it can be downright difficult. Thankfully there are ways to successfully transition.
RetirementWe discuss the advantages of seeking professional help when it comes to managing our retirement account.
RetirementA traditional IRA gives you complete control over your contributions, and offers a nice complement to an employer-provided savings plan.
RetirementThough dreamed of by many, for most, early retirement is not a viable option. Instead, consider a midlife career change.
BudgetingIf you’re worried medical expenses could overwhelm you, there are some thing you can do to ease your concerns.
InsuranceMedicare is the United States’ health insurance program for those over age 65. Medicare has four parts, but you might not need them all.
RetirementFind out how your 401(k) works after you retire, including when you are required to begin taking distributions and the tax impact of your withdrawals.
Personal FinanceWhile there’s still potential for some “tweaking” around your Social Security retirement benefits, I’d like to share some insight on what we know now.
RetirementThe Philippines has a warm climate, a low cost of living and plenty of people who speak English. What to do next if you think you want to retire there.
RetirementLearn more about the current financial situations retirees are facing and discover four books that every prospective and current retiree must read.
Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
401(k) rollovers are generally not taxable as long as the money goes into another qualifying plan, an individual retirement ... Read Full Answer >>
Unlike regular employee deferrals, catch-up contributions are not included in the 415 limit. While there is an annual limit ... Read Full Answer >>
Depending on the terms of your plan, catch-up contributions you make to 401(k)s or other qualified retirement savings plans ... Read Full Answer >>
Though the Internal Revenue Service (IRS) carefully scrutinizes the contributions of highly compensated employees (HCEs) ... Read Full Answer >>