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How to Factor Long-Term Care Costs Into Your Retirement Plan

How to Factor Long-Term Care Costs Into Your Retirement Plan
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(This article by Kimberly Lankford originally appeared in Military Officer, a magazine available to all MOAA Premium and Life members. Learn more about the magazine here; learn more about joining MOAA here.)

Even if you've been planning your retirement for years, one major expense can ruin your financial plans: The cost of long term care.

Today's 65-year-olds have almost a 70-percent chance of needing some type of long term care services in the future. And costs are high, no matter where you receive it. The average cost of a private room in a nursing home is more than $100,000 per year, according to the Genworth Cost of Care Study. A year in an assisted-living facility averages $48,000, and the average cost of a home health aide working a 44-hour week adds up to more than $50,000 over the year.

If you've helped your parents or other elderly relatives find care, you know how quickly these costs can deplete a lifetime of savings. It's essential to factor these potential costs into your own retirement plans and to find out whether you're eligible for any special programs and other ways to help cover these expenses.

Financing Long Term Care

Many people assume these costs will be covered by a government program, but Medicare covers very few long term care expenses, and Medicaid only kicks in if you've spent almost all of your assets. Servicemembers, veterans, and military retirees might have access to some additional programs to help with long term care. The VA, for example, has programs that provide adult day health care, home health care, and long term care housing. But many of these programs require you to have a disability rating from the VA and receive VA compensation, and they might have additional financial requirements, says Lt. Col. Shane Ostrom, USAF (Ret), CFP®, program director for finance and benefits information at MOAA. You can find more information here.

Also look into the VA's Aid & Attendance benefit, which helps pay long term care costs for veterans who served during wartime and are 65 or older and meet certain asset requirements. Surviving spouses also might be eligible. For more information about the requirements and benefits, go here and click on “Aid and Attendance and Housebound.”

Find out whether or not you're likely to qualify for any military-related long term care benefits as part of your retirement planning - long before you need the care. Ostrom recommends talking with a veterans service officer in your county to find out more about your eligibility for these programs, or calling the VA at (800) 827-1000 for more information and local service officer contacts.

Long Term Care Insurance

Another way to cover some of these potential expenses is to buy long-term care insurance, which can help you pay for the cost of care in your home or a nursing home or assisted-living facility. You choose the daily or monthly benefit amount and the benefit period - such as $150 a day for three years. The larger the daily benefit and the longer the benefit period, the higher the premiums.

These policies generally pay out after you need help with at least two of six daily living activities (such as bathing and dressing) or if your doctor provides evidence of cognitive impairment. You choose a waiting period before benefits begin (such as 60 or 90 days). You can reduce your premiums with a longer waiting period, but you'll have to pay for care out of your pocket before the benefits kick in. Because you might not need care for another 20 or 30 years, it's also important to have inflation protection. Most people currently choose to have benefits increase by 3 percent compounded each year.

The sweet spot to buy long term care insurance tends to be in your 50s or early 60s, says Ostrom. If you wait until you're older, you'll have to pay higher premiums, and you'll be more likely to have a medical condition that makes it difficult to qualify for a policy.

Several insurers offer long term care insurance, and servicemembers and military retirees (and their eligible family members) also can buy coverage through the Federal Long Term Care Insurance Program (FLTCIP), which provides policies at group rates. You can find more information about eligibility, plus a premium calculator and cost-of-care tool, at www.ltcfeds.com.

Do the Legwork

Ostrom recommends comparing FLTCIP to the premiums and coverage for buying a policy on your own. Some insurers' policies are a better deal than others' depending on your age, health condition, and whether or not you're married. You can ask a financial planner or insurance agent about your coverage options. MOAA also offers a long term care buying service that connects members with an independent broker who can do the shopping for you. “Educate yourself on the details and the cost and what to look for,” says Ostrom.

The cost of long term care insurance has increased significantly over the past several years. Rather than buying a policy that covers the full cost of care in your area, consider covering some of the potential costs with your savings or income and buying just enough coverage to fill in the gap. Don't choose a policy with premiums you can barely afford now; your premiums can increase in the future, which came as a surprise to many people who bought policies in the past 20 years.

Another option is to buy a policy that combines life insurance and long term care coverage. Some life insurance policies let you tap the death benefit early if you need long term care or provide additional long term care payouts. If you don't end up needing the care, your heirs will receive a death benefit.

No matter which route you choose, it's important to consider how you're going to pay for potential long term care expenses when planning for your financial future.