Building your retirement game plan: Healthcare and long-term care (Part 4 of 5)

| August 20, 2014

The days of retiring and living out your golden years, paid for by a small pension and supplemental Social Security payments, are long gone. Today, Americans who reach the traditional retirement age of 65 can expect to live another 18.6[1] years, which means they will spend a great deal more than they might expect – especially on the skyrocketing costs of healthcare and long-term care.

To make matters worse, these expenses are most often unpredictable. Nobody knows when he or she will get sick or injured or how much a treatment will cost.

So, how do you plan for something impossible to predict?

First, you have to understand your health risks. Based on your lifestyle and family history, you can get a good idea of your future vulnerabilities. For instance, if you have a long history of breast cancer in your family, or you are a heavy smoker, you should plan for the possibility that you could develop breast or lung cancer in your future.

The key to good retirement planning is to honestly assess how much money you will need in retirement, and make a plan that fits into that budget. It’s increasingly likely that you’ll need to replace 100 percent of your income in retirement – especially if you’re at high risk for sickness or injury.

Americans become eligible for Medicare at age 65, which means if you stop working before then, you’ll be on the hook to bridge the health insurance gap until you turn 65 and Medicare kicks in.

But, one of the biggest mistakes people make in the retirement planning process is overestimating the amount of coverage they will receive from Medicare. A recent [2]Nationwide Financial study found that respondents wildly overestimated that amount. In reality, Medicare will only cover about 51 percent of costs, according to the [3]Employee Benefit Research Institute. And, Medicare does not cover nursing homes, assisted living facilities, or in-home custodial care.

Furthermore, the traditional “safety net” programs for retired workers (Social Security and Medicare) are all under significant financial pressure. While the future is unclear, it is reasonable to expect that benefits in all of these programs will trend downward over time. Thus, individuals will have to look to their own resources to make up the slack.

Long-Term Care
Long-term care is another important aspect of a financial plan that is often overlooked. Long-term care insurance can help pay for services needed due to chronic illness, physical disability or cognitive (mental) impairment, including skilled care such as nursing, or non-skilled personal or custodial care including services to support activities of daily living such as bathing, dressing and eating.

According to the [4]U.S. Department of Health and Human Services, about 70 percent of individuals over the age of 65 will need long-term care services during their lifetime.

With healthcare costs rising faster than inflation, ([5]Fidelity Investments estimates a 7-percent annual increase) future costs are likely to be significantly higher than they are today.  For instance, home health aide visits typically are three times a week for four hours each and cost $25 per hour or $15,000 per year. And a one-bedroom unit in an assisted living facility, at $2,691 per month, costs over $32,000 per year.

Unfortunately, many people underestimate the cost of long-term care and how it can deplete the assets they’ve accumulated over a lifetime. Many are surprised to learn that most employer-sponsored and private health plans, as well as Medicare and Medicare Supplement insurance, don’t cover long-term care. Medicare pays for long-term care only if you need skilled services or recuperative care for a short period of time following a hospital stay— it does not pay for non-skilled assistance with the activities of daily living that comprise most long-term care services.

State Medicaid programs cover some long-term care services only for people who have a low or no income and few financial resources. Federal programs such as the Older Americans Act and Veterans Affairs pay for some long-term care services as well, but only for specific groups of people and in specific circumstances.  Long-term care costs vary considerably by state, so check out Genworth’s Cost of Care webpage for a detailed breakdown of costs in your state.

Next up: The final installment of our five-part retirement planning series, “The Retirement Game Plan,” in which we’ll discuss ways you may be able to enhance your retirement income.

 This article was previously printed in a First Command publication.

[1] National Center for Health Statistics. Health, United States, 2010. Table 22.

[2] Healthcare Costs in Retirement Study, Harris Interactive on behalf of Nationwide Financial, 2012.

[3] Fronstin, Paul. “Savings Needed to Fund Health Insurance and Health Care Expenses in Retirement: Findings from a Simulation Model | EBRI.” Employee Benefit Research Institute | EBRI. May 2008.

[4] U.S. Department of Health and Human Services Fact Sheet, .

[5] Kaiser Family Foundation, A Primer on Medicare Spending and Financing, 2011.

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