Long-term care: How to include it in your budget and financial plan

As we age, we adapt—like learning how to move from working a 9 to 5 to spending our days in retirement. Another age-related adaptation? Figuring out the care we might need later in life, including long-term assistance or nursing home stays.

The reality is that most of us will need long-term care: About 70% of people turning 65 has a chance of requiring some form of support and services. And the cost for that care can quickly add up. The average fee for a health aide is over $20 an hour, while a semi-private nursing home room costs nearly $7,000 per month.

How can you plan now for something that you’re not sure you’ll need, or even when or what type of assistance you may need? A good start is understanding the kinds of long-term care and the ways you can plan now to help pay for it later.

Long-term care is a catch-all term for any sort of aid or assistance, whether over a period of months or years, that you may need as you age. That care could be as simple as transportation to and from an appointment, or as complex as 24/7 memory care. The range of long-term care options is either provided to you in your own home or while you reside at a care facility.

In-home care may include daily meal delivery, therapy for a medical condition, or several hours of help to deal with daily living needs. Someone who lives independently may spend part of each day in a facility for services; that’s usually considered in-home care.

Residential facilities also vary in the types of care and services they offer. Some have independent living options, with apartments for those who are mostly able to live on their own but want to be in a larger complex with personal care or assistance, if needed. Other facilities may offer skilled or intensive long-term care for those with increased needs such as assisted living, skilled nursing, or memory care.

Budgeting for long-term care can feel a little like gazing into a crystal ball. You can’t predict the future. You can, however, take stock of some general costs to start estimating the resources you may want to have access to.

While long-term care costs will vary based on where you live and the kind of care you might think you need, in general, home care averages about $42,120 a year, if you need six hours a day of care, five days a week. A nursing home, on the other hand, may cost about $100,000 a year for a semi-private room. A financial professional can help you start to make some estimates about resources you think you may want to have available.

Much as people pay for retirement in different ways, they also pay for long-term care needs in different ways. That includes:

• Federal programs, including Medicaid: Medicaid may help pay medical expenses and long-term care costs for people with low income and few assets. It is a federal program with guidelines and some mandates, administered by each state, which chooses its own funding plans and eligibility. While Medicaid may pay for nursing home costs, there are strict financial rules for Medicaid coverage to kick in, which often include spending down all your assets first. In addition, recently enacted federal provisions may affect certain aspects of Medicaid funding for nursing homes such as the time period covered when a person first applies until eligibility is established. Veterans may also be eligible for care through programs offered by the Department of Veterans Affairs.
  
  One note: Medicare does not pay for most long-term nursing home care, non-medical in-home care, adult day care, or assisted living facilities. It may cover short-term (typically about 20 days) stays at skilled nursing facilities and some home health services and medical supplies.
   
• Traditional long-term care insurance: Some health insurance policies will pay for some nursing home and long-term care expenses; traditional long-term care insurance is designed to fill part or all of that gap. They work like other insurance policies—you select coverage levels and premiums, but reimbursements may not start until several months after you need coverage. As with most insurance policies, you can’t wait to get the policy until you need it; you must get it in advance. In addition, the older you are, the more traditional long-term care insurance costs.
   
• Other insurance and guaranteed income options: Some life insurance policies may allow you to borrow against the policy or withdraw benefits early in certain cases to help pay for long-term care. Paying for long-term care with funds from an annuity may also be an option. With an annuity, you pay a lump sum up front, which is paid out to you as a guaranteed annual income. Some annuities have special contract terms designed specifically to help cover the costs of long-term care. If you don’t need to rely on long-term care, you still retain your investment and your beneficiaries get what remains; this isn’t the case with long-term care insurance. But pay attention to coverage time limits, which may impact expenses. Women, on average, need care 3.7 years, while men require care for an average of 2.2 years.
   
• Health savings accounts or HSAs: If you have a high-deductible health insurance plan at work and save in an HSA, those pre-tax dollars can be spent in retirement for IRS-qualified medical expenses for you or a spouse. HSAs may also be spent on certain long-term care expenses. Check with your benefits administrator to see what your account may cover.
   
• Self-funding: This is exactly what it sounds like—you pay, out of pocket, for the cost of the care you need, when you need it. It might mean tapping into your savings, investments, or retirement accounts. Few may be able to afford this, which requires deep assets and savings. And, if unexpected care-related needs happen, you may use more of your savings than planned.

Many adults—43%—aren’t confident they’ll have the financial resources to cover long-term care. Not quite one-third of those nearing retirement, ages 50-64, have funds to help with those types of future needs.

That leaves family and loved ones, who provide 80% of at-home care, typically unpaid. Two-thirds of those caregivers, who supply 20 hours per week, are women. Providing that care may mean trimming their own home budgets or struggling to pay bills.

There are resources, respite care, and support for those who are caring for an elderly loved one at home. A good place to start is the non-profit Family Caregiver Alliance.

Every life stage demands financial juggling, from the days spent establishing a career to the saving for children (if you have them) alongside retirement. Thinking about long-term care is no different. “The sooner you start planning for long-term care, generally speaking, the more choices you’ll have,” says Heather Winston, head of product strategy for individuals, Retirement and Income Solutions at Principal^®. “And having a plan in place may reduce any stress that a long-term care event might put on family members and loved ones.”

Those you trust, like a tax advisor or financial professional, can help. A whole new profession, called an aging life care professional or geriatric care manager, may also serve as an advocate. They’re a person who offers a range of services; you pay them up front to help you figure out your plan.