Your Hidden Retirement Risk

by Cathy S. Butler, Morgan Stanley

You have spent years carefully working and planning so that you have enough income for a comfortable retirement. You may think your retirement savings are protected, but have you ever considered what might happen if you or your spouse required long-term care?

The cost of long-term care services—whether provided in the home, at a community facility or in a nursing home—may not be covered under major medical plans or Medicare, and can be a threat to your retirement savings. Planning for long-term care can help you manage this risk and give you more choices and control over the care you receive.

Benefits of Talking about Long-Term Care
Nobody wants to think about losing their independence and having to rely on others for care. But talking about and planning for long-term care is important because there is a good chance you will need long-term care services at some point in life. In fact, about 70 percent of people over age 65 will require some care at some point in their lives—and the likelihood of needing care increases as you age. While long-term care is often associated with the effects of aging, it may be needed at any time due to an accident or illness. Some conditions that may require long-term care include stroke, cancer, Alzheimer’s disease and dementia.

In addition, talking about long-term care is important because the cost of long-term care services often exceeds what the average person can pay from income and other resources, particularly in retirement. Consider this: the projected national average cost for five years of long-term care 30 years from now is more than $1.9 million, according to the John Hancock Insurance Long-Term Care Calculator.

Keep in mind that your retirement may be significantly longer than that of your parents and grandparents. If you’re a married couple and each of you is 60 years old, there is an 89-percent probability that one of you will live until age 85. And as you get older, your healthcare expenses are likely to increase. In fact, according to the Employer Benefit Research Institute, a 65-year-old couple would need $265,000 in savings to have a 90-percent chance of meeting healthcare costs in retirement—and that doesn’t even include the potential costs of long-term care.

Paying for Long-Term Care
A common misconception is that Medicare or Medicaid will pay for all expenses. But the reality is, Medicare does not pay for assisted living facilities, continuing care retirement communities or adult day services. Medicare does provide limited coverage for nursing home care or home health care under certain conditions. For the most part, however, the costs of long-term care will be your responsibility.

One alternative to paying these expenses out of your own pocket is long-term care insurance. By paying an annual premium, perhaps from your investment earnings, you can transfer the risk to an insurance company and help protect your assets from long-term care costs. Long-term care insurance can also help you maintain your independence and give you the freedom to choose the type of care you want.

Here is a checklist of questions to think about if you are considering long-term care insurance:

  • How much protection (daily benefit) does the policy provide?
  • Does the policy contain inflation protection?
  • How many years of institutionalization are included?
  • Is custodial care (assistance with basic day activities either in your home or a nursing home) covered?
  • Is home care covered?
  • Does the policy have restrictive provisions on pre-existing conditions?
  • Is the right to renew the policy guaranteed for life?
  • How financially sound is the company offering the policy?
  • What are the monthly/annual costs versus cash flow and investments?

If you’re not sure whether long-term care insurance is right for you, your financial advisor can help you understand and explore your options for offsetting the risks that long-term care might present to your retirement. iBi

Cathy S. Butler, CFP, CRPC, is a vice president, financial advisor and portfolio management director at Morgan Stanley. She can be reached at Cathy.Butler@morganstanley.com or (309) 671-2873. For more information, visit fa.morganstanley.com/ccg.

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