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By Elaine K. Howley. Feb. 14, 2022, at 2:19 p.m.
This article is based on reporting that features expert sources.
As the population of adults over age 65 in America continues to increase, many are facing a serious dilemma over how to finance the care they’ll need in their golden years.
Financing assisted living and other forms of long-term care after retirement is a bit like an absurdist word problem in sixth grade math class: If you retire at 65 and need to enter an assisted living facility 10 years later, how much money will you need to pay for the impossible-to-predict level of (potentially very expensive) health care you’ll need over what could be a similarly hard-to-estimate multi-year timeline?
These are critical questions that all older adults need to consider because most facilities rely primarily on private payment, and Medicare does not cover the cost of assisted living facilities, says Roxanne Sorensen, an aging life care specialist and owner of Elder Care Solutions of WNY in Rochester, New York, a case management consultancy.
“Medicare does not pay for any form of assisted living. It only pays for rehab in a nursing home for the first 100 days. After that, there’s no more assistance from the government unless you’re on Medicaid,” and Medicaid only kicks in once someone has spent down all of their assets and is essentially destitute.
Medicaid-funded assisted living does exist, but what exactly is covered by Medicaid varies by state to state. However, you may find that most assisted living communities only offer non-Medicaid forms of payment.
Haidy Andrawes, center administrator at Park Vista Assisted Living in Fullerton, California, notes that sources of private funding can mean “a combination of personal savings, pension payments and retirement accounts. Though many seniors save for retirement of the years, family members will often contribute to the costs.”
The High Price of Assisted Living
Gathering up enough funding to cover your needs out-of-pocket later in life can be a tall order. According to Genworth Financial’s 2021 Cost of Care Survey, the median yearly cost for an assisted living community is $54,000, which is up from $28,800 in 2004. Long-term care by a home health aide tops $61,776 annually. And skilled nursing in a private room will set you back, on average, $108,405 annually.
Though prices vary greatly depending on the region of the country and the range of services you’re accessing, the fact remains that most seniors are looking at assisted living costs of $4,500 per month or more to pay for assisted living, says Han Hwang, executive vice president of partner sales and success for Caring.com, an online resource for people seeking information and support in caring for aging parents, spouses and other loved ones.
“Would you want to live in a cheaper area?” he asks, noting that this is an important question you should consider when determining how to pay for care later in life. (Caring.com has a ranking of average costs by state.) For example, you’ll likely pay less for care in Montana or Idaho than you will in Massachusetts or California.
How much you’ll need for your entire stay depends entirely on where you live, how long you stay and what medical and non-medical care services you access while in assisted living. The Centers for Disease Control and Prevention reports that the average length of stay in an assisted living community is 22 months. Multiply that average length of stay by the annual median rate of $54,000, and you’ll need $99,000 to pay for just that aspect of care.
And that’s just the average – in some parts of the country you can expect to need a lot more money. Add to that the fact that, according to the National Center for Assisted Living, about 60% of patients will transition from assisted living to a skilled nursing facility, which costs even more.
The average monthly costs for a semi-private nursing home room is $7,908, or a private room is $9,034, according to Genworth. And if you need care services like memory care for dementia, you can expect to pay even more; the Alzheimer’s Association reports that the estimated lifetime cost of care for someone with dementia is over $350,000.
These assisted living costs are likely to continue rising, as the COVID-19 pandemic has taken a grave toll on the senior care industry. “Operators’ costs are higher,” on the order of tens of millions for the larger publicly traded assisted living companies, Hwang says. These increases are related to the need for more personal protective equipment and staff to cover shifts when other workers get sick.
Finding and retaining enough staff has also become a major issue since the pandemic began. Jobs in this sector tend to be lower paid, and as such, the growing labor shortage in America is putting additional pressure on assisted living communities.
Save Early and Often
These high living costs are “all the more reason that we don’t only need to save for retirement, but we need to also save for the possibility of needing assisted living” in retirement, says Scott Tucker, president and founder of Scott Tucker Solutions, Inc., a Chicago-based financial planning company that specializes in helping clients plan for retirement.
Saving your private funds early and often should form the foundation of your plan. “The key really is the stuff my grandpa told me,” Tucker says. “He was a World War II veteran. Folks like him who lived through the Depression – they always tried to save as much as they could and spend as little as they could.”
It seems that lesson didn’t translate from the so-called greatest generation to their baby boomer children. “Generally, in the U.S., we see baby boomers and the younger generations not saving enough. The culture has changed and people are not saving enough,” so by the time they start thinking about retirement, often in their 50s or 60s, “there’s nothing to work with,” and the fear is, it might be too little, too late by then.
It’s a tough topic to tackle, especially when so many people are struggling to make ends meet today, much less think about what’s going to happen 40 years down the line. “What everyone wants to do is put this off until the kids are out of college, or until after Thanksgiving, or after we retire next year,” Tucker says, but this important planning needs to happen “much earlier, and folks are not realizing that.”
Making plans with your private funds at age 40 versus age 70 can make an enormous difference, Tucker says, noting that the younger you are when you start, the smaller the effort you’ll have to make to add up to enough savings later on.
Planning for Retirement
No matter when you start, there are a variety of ways to plan for retirement and finance assisted living, and finding an advocate or planner to help you might be a great option for many families, Sorensen says.
Contact your local Area Agency on Aging, a non-profit designed by the state to address needs and concerns for older adults in the region. Many municipalities also have a local Council on Aging where you can connect with local services and find support.
“It’s really complicated,” but Sorensen’s business and many others like it across the country can help families navigate the challenging issues and questions:
Which living facility type to enter?
How to pay for it?
What do different insurance plans cover?
How to plan?
Sorensen and other case managers and advocates like her have extensive experience and understanding of this fractured senior care system and relationships with assisted living facilities, meaning they may be able to cut through some of the complexity much faster than the average person.
The bottom line is, “money is the key to everything. I hate to say it that way because medical care and compassion are a part of it, but it’s lower on the totem pole,” she says of the problem of financing assisted living in America.
It seems that if you have the money, you can buy those things. But it all starts with enough money to get you into an appropriate care situation.
How to Pay for Assisted Living
There are a number of strategies you can use to pay for senior assisted living and other long-term care options, including some of the most common ones outlined here:
Long-term care insurance.
Pensions, annuities, and investments.
Long-Term Care Insurance
Similar to health insurance, long-term care insurance ostensibly exists to cover you in the event that you need care in retirement. These policies are intended to cover your long-term health care needs. It may come into play for at-home care, an assisted living community or other long-term care facilities.
Such policies can be a good option, but Tucker says this probably shouldn’t be your primary choice for funding assisted living because “the way these policies are constructed, they allow the company to change the premiums as you get older or to reduce the benefits if you can’t afford the higher premiums. It doesn’t always work out” the way you might expect it to.
Sorensen adds that there can be other challenges associated with accessing the benefits of these policies. “It’s like your car insurance or homeowner’s policy. You pay for them, but (the insurance companies) don’t want you to take advantage of them. They’re trying to find ways of not letting you use the benefits, so you have to jump through a lot of hoops to trigger that policy.”
Hwang notes that long-term care insurance companies must approve your request to move up front, which can limit your options. But, “if you really do believe that you’re going to need assisted living in the future and you’re able to make that decision, you may want to look at a care insurance policy to pay for some of that.”
Once a long-term care policy has been triggered, it may provide a good source of funding for your needs. Read the fine print and be sure you know what you’re buying if you purchase such a policy.
Some life insurance policies include a provision for long-term care benefits. “Some have an option to be able to cash out the policy,” Hwang says, turning that policy into a life settlement, something like a savings account you can tap for your own needs later in life rather than leaving behind for your heirs or beneficiaries.
Tucker says such policies can be a good option for financing assisted living because these long-term care benefits are less changeable than those typically found in long-term care insurance policies, making them a potentially more stable option.
Also, be sure to pay the policy as stipulated in the contract. “If you forget to pay the premium, they’ll cancel your policy,” Sorensen says, and then that money you invested in the plan will be lost. Again, read all the fine print and be sure you understand the terms of any agreement you sign.
Pensions, Annuities and Investments
If you’re lucky enough to have a pension, that’s a good way to help pay for care in an assisted living community. Similarly, if you contributed to a 401K plan, an IRA or another investment product while you were working, that money will hopefully be there for you when you need it. Social security benefits are also a common way for seniors to pay for assisted living, Hwang says.
“A lot of folks come to us, and if they don’t have a pension, they might need a fixed annuity to act like a pension,” Tucker says. Annuities are financial products that pay the owner on a regular basis and, in some cases, they can be structured to essentially replace the paycheck you used to receive from your job. Most insurers will sell annuities to individuals between the ages of 50 and 90.
Volatility in the economy over the past decade-plus has cost some seniors savings. Ongoing pandemic-related upheavals may also have long-term implications for how much money you’ll have at the ready when it’s time to head into an assisted living community. Until then, stay on top of any retirement plans or investments you may have so you know what to expect.
For people who served in the military and meet the criteria of the program, Veterans Aid & Attendance benefits and Housebound allowance can be a great option to pay for assisted living in retirement. Sorensen says these veterans benefits can be significant ranging from about $1,000 to over $2,000 per month depending on the circumstances.
This federal money sometimes helps her clients “stretch what their investments or savings can do. Maybe that $1,700 bought them a year or two instead of having to utilize all their checking, savings and those annuities. I always try to tap into the VA system if possible, as that’s a really great way of putting someone into assisted living or assisting with nursing home placement,” she says.
Given that it’s impossible to know how long you’ll live or how much money you’ll need, it’s important to maximize the money you’ve saved so that you can access high-quality care for as long as possible.
If you own a home, that property can be a very large asset that may well offer you the means to pay for care in retirement should you need it. “If you had some home equity, even if your spouse dies and you’re planning to remain in the home, you could take out a reverse mortgage,” Tucker says.
With a reverse mortgage, you sell your home back to the bank a piece at a time while you continue to live there. This results in a monthly check, “freeing up tax-free money without creating additional payments” for yourself as might happen with an insurance policy you’re paying into.
You can also sell your home outright and downsize. “If you’re the last surviving spouse and the kids don’t want the house, you could sell the house to pay for assisted living. You can even take a short-term loan or bridge loan” from the assisted living facility you’ll be entering while the house is sold, if you need to get into a facility in a hurry after a medical event, for example, Tucker says.
“If you sell that home, that’s a significant amount of income that can last for a long time,” Hwang adds.
If you’re on a longer time horizon of needing care, you might consider simply downsizing and investing the profits. Many older adults sell the home where they raised their children and move into a smaller and less expensive-to-maintain condo or retirement community.
They can then use the proceeds to bolster savings for whatever their health care needs may be down the line or to enter an assisted living facility when the time comes.
Find Qualified Help
To help you sort through all of the variables and navigate what can be a complicated and sometimes emotionally fraught process, you might want to seek the help of a financial planner or advocate who’s well versed in issues of paying for assisted living and long-term care.
Particularly for people who are helping their aging parents navigate these challenging questions, dealing with the future is something that should happen now and with qualified help. “Families are making some of the most important decisions of their life while they’re emotional,” Sorensen says. But you need time to think.
For this reason, she says it’s critical to do some pre-planning before you hit that crisis moment when a loved one has, for example, had a stroke and suddenly needs a lot more assistance than he or she once did.
“The best advice I can give anybody is to pre-plan.” Discuss what could happen and how you’ll handle various situations. “At least have a plan and find out what their wishes are,” she says.
In addition to talking about what your loved one would prefer, Sorensen says you need to discuss “the facts. What is their income? What investments do they have?” If your loved one is hesitant to share the details of their financial situation, it’s important to find out at a minimum the type of accounts they have and who to contact if they’re incapacitated.
After a medical crisis, Sorensen says “most families come into a house and don’t even know where to look” for the paperwork that will explain a loved one’s investments and their life insurance.
The bottom line, she says, is to put together the beginnings of a plan as early as possible:
Get power of attorney and a health care proxy in place.
Do the pre-planning. “You may not need to put the plan in place for five or 10 years, but at least you have a starting point,” Sorensen says.
Think ahead in terms of health needs. Hwang adds that “cost really depends upon your levels of care,” so think about your state of health and anticipate what services you might need in the future. The more care you think you’ll need, the more it’s going to cost and the bigger nest egg you’ll need to cover those needs for the rest of your life.
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