Planning for long-term care can be daunting—especially if you’re years away from retirement. Given so many unknowns, it can be tempting to take a wait-and-see approach. However, recent developments in Washington State suggest that local governments may force the issue sooner than later.
Whether you purchase private insurance or not, it’s important to have a plan in place for how you’ll pay for long-term care if you need it. Otherwise, the state may come up with a plan for you.
What’s Happening in Washington?
In 2019, Washington State passed a first-of-its-kind long-term care benefit program. Now, Washington is making headlines again as residents scramble to avoid a looming new payroll tax.
Beginning January 1, 2022, W2 employees in the Evergreen State will pay 58 cents for every $100 of income they earn to a long-term care benefits fund until they retire. The fund will provide eligible workers with a maximum $36,500 lifetime benefit if they qualify. The state estimates that seven out of 10 taxpayers will use the program at some point during their lifetime, consistent with the national average.
According to Genworth’s 2020 Cost of Care Survey, the median cost of a private room in a nursing home facility now exceeds $100,000 per year. Meanwhile, the average woman needs 3.7 years of long-term care. The average man needs 2.2 years. Since neither traditional healthcare insurance nor Medicare covers long-term care, most Americans simply can’t afford it.
Indeed, Washington’s program may defray the cost of long-term care for many residents—to an extent. However, many critics believe the maximum benefit is far too small to make a difference. In addition, the benefit isn’t portable, so anyone who moves out of state loses it. And since the benefit is capped, high earners contribute more to receive the same coverage. In other words, the program isn’t a silver bullet.
Washington residents may opt out of the payroll tax by November 1, 2021, if they have private long-term care insurance. But those without insurance will be stuck with the state’s plan—for better or worse. Should other states follow suit with similar programs—or not—it’s a helpful reminder to begin planning now.
How to Plan for Long-Term Care
The National Institute on Aging defines long-term care as “a variety of services designed to help people live as independently and safely as possible when they can no longer perform everyday activities on their own.” As you plan for this, a helpful first step is to gauge your likelihood of needing these services at some point.
One way to do so is to look at the numbers. For instance, about half of people turning age 65 will need some type of paid long-term care services in their lifetimes, according to data collected by Morningstar.
Of course, statistics don’t always tell the whole story. Ultimately, how you plan for long-term care comes down to a variety of factors, including your finances, age, health, and personal circumstances.
Should You Purchase LTC Insurance?
Long-term care insurance can be an effective way to plan for unexpected healthcare expenses. However, private insurance has its downsides. For example, it tends to be expensive. According to data from the American Association for Long-Term Care Insurance, a policy valued at $165,000 costs the average single 55-year-old woman $1,500 annually. And premiums only increase as you get older.
In addition, not everyone qualifies. An insurance company can refuse to cover you for any number of reasons—some of which may surprise you. And according to some sources, insurers are finding even more reasons to deny people coverage due to the Covid-19 pandemic. The long-term impact on the industry remains to be seen.
Nevertheless, under the right circumstances, insurance may be your best option when it comes to planning for long-term care. If you’d like to learn more, here’s an article I wrote earlier this year: Is Long-Term Care Insurance Right for Your Retirement Plan?, which can help you weigh the costs and benefits.
Self-Funding Your Long-Term Care
If you don’t purchase insurance, another option is to self-fund any long-term care expenses you incur. You may want to familiarize yourself with the care facilities in your area and other services to help you estimate potential costs. Genworth’s Cost of Care Calculator allows you to look at average costs by state, city, and zip code, as well.
The next step is to assess your financial resources. If you haven’t factored potential care expenses into your retirement savings goals, you may have some catching up to do. Keep in mind that median nursing home costs for a private room have increased about 4% annually, according to Morningstar.
It may be helpful to create a dedicated fund rather than rely on your retirement savings alone. For example, an individual retirement account (IRA) or health savings account (HSA) can provide tax advantages and keep your long-term care savings separate from funds earmarked for daily living expenses in retirement.
Be sure to consult with a financial professional since these accounts have rules and restrictions that may impact your decision. A financial planner can also help you invest your funds appropriately, so they outpace potential inflation over time.
Public Resources for Long-Term Care
Finally, if you simply can’t save enough to self-fund care and insurance isn’t an option, you may have to rely on government resources like Medicaid. The criteria to qualify for Medicaid tends to vary by state. If you believe Medicaid is your only option when it comes to planning for this, be sure to familiarize yourself with your state’s financial eligibility requirements.
A Financial Advisor Can Help
While Washington’s long-term care program may have its shortcomings, it also highlights a glaring issue. That is, most Americans don’t have a plan (or the financial resources) to fund their needs.
We don’t know if other states will follow Washington’s lead or come up with better funding solutions. In the meantime, the best way to prepare is to start planning now.
Align Financial can help you develop a long-term financial plan that addresses your unique needs and goals. If you need help planning for retirement and unexpected costs like long-term care, please contact us to set up an introductory phone call.