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Monday, September 1, 2014

Long Term Care

In my last post, The Thing That's Missing, I used long term care risk as an example of retirement risks that aren't really addressed by retirement spending strategies, but need to be considered in a comprehensive retirement plan. Nonetheless, the possible need for long term care late in life is on the minds of most retirees.

Medicare doesn't cover long term care expenses. Medicaid will, but only after the patient's assets are depleted. Medicaid is a jointly-administered program by state governments and the Federal government, so the rules vary by state.

Depleted means that most savings has been spent and property has been sold. Some assets and income are excluded from Medicaid eligibility calculations. Surviving spouses are afforded some protections, including postponing the sale of the patient's home, so long as the patient or spouse still live in it. Again, these rules vary by state.

A retiree who relies on Medicaid to pay for long term care will have little left to bequeath to heirs. It is this risk of losing all one's wealth at the end of life, and a concern for the quality of long term care the patient will be able to afford, that drives retirees' fears. Retirees without heirs and a surviving spouse could presumably be less concerned. According to HHS, less than 15% of nursing home patients have a surviving spouse.

As I wrote in Long Term Care Insurance some time ago, the LTC insurance industry states some pretty scary facts in their advertising, like “nearly two-thirds of Americans over the age of 65 will require long-term care” and “long-term care can cost over $75,000 a year.” Both statements are correct, if misleading.

According to a Genworth report, $75,000 a year is a good current estimate for North Carolina, but $125,000 a year would be closer for New York. Many patients, however, have stays shorter than one year.

I mentioned in that post that studies show about 43% of retirees are likely to have no long term care needs, at all. Another 19% will be in long term care for short periods and the cost, less than $10,000, will be manageable out of pocket. That's 62% of retirees who won't have a big LTC problem.

Another 8% will have costs between $10,000 and $25,000, possibly also a manageable amount.

About 30% of retirees, though, will have costs exceeding $25,000 and some will pay a lot more. Care for an injury like the one sustained by Christopher Reeve is estimated to cost $1M the first year and nearly $2M each subsequent year. Put this all together and LTC costs can range from zero to millions of dollars a year and can occur at any time (about a third of long-term care patients are under the age of 65).

Or never.

Risks like that are difficult to plan for.

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