For many people approaching retirement,health care is a financial wild card—thereis no way to predict their health, or healthcare costs, during this life phase. In fact,results from The 2006 Merrill Lynch NewRetirement Study show that 53 percent ofrespondents worry about their ability to coverongoing health insurance premiums, and 71percent would be willing to work a few extrayears in retirement in order to save moremoney for health care costs.
When analyzing the future of your healthcare costs during retirement years, animportant consideration is the possibilityfor the need of long–term care. In 2000, a65–year–old woman could expect to live anadditional 19.5 years, while a 65–year–oldman could anticipate living another 14.5years—and longevity projections continueto increase. In addition to longer life spans,there is another statistic that can significantlyimpact your overall retirement strategy:about 60 percent of Americans over the ageof 65 will need long–term care at some pointin their lives, and the average period of suchcare is 2.5 years.
Because long–term care can be extremelycostly, adequately preparing for it is anessential consideration to maintain yourlong–term financial goals.
In fact, sources report that the costs oflong–term health care are on the rise. A 2007survey by Genworth Financial found that theaverage rate for a private room in a nursinghome was $205 a day, or about $75,000 ayear. A 2004 survey by Metropolitan LifeInsurance Co. found that in some areas of theU.S., nursing home costs are as high as $331per day, or over $120,000 per year. Assumingan increase of 6 percent per year, costs willdouble in about 12 years. Thus, by 2017,the average cost of a nursing home could benearly $140,000 per year, and much higher insome areas.
Even when long–term care is received athome, the cost of non–institutional care canbe significant. Metropolitan Life puts theaverage hourly rate for home health aides at$18 per hour. If aides are paid that rate for 11hours a day or more, the cost of home carewould exceed the already–high average cost ofnursing care noted above.
Purchasing Long–Term Care Insurance
For many people, the thought of spendingsix figures a year for such care—perhaps overthe course of many years—is truly daunting.Married couples also face the prospect ofone spouse incurring extensive costs in along–term care facility while the other spousecontinues to live independently and bear theexpenses of maintaining a home.
Such financial risks may be minimized withthe purchase of long–term care insurance.Long–term care policies offer a wide varietyof plan options. Some policies may pay forcare not only in a nursing home, but also inan assisted living facility or at the home ofthe individual who needs care. Policies mayinclude cost–of–living adjustments, whichwould increase future benefit payments,and some companies also offer long–termcare policies that cover both spouses at adiscounted rate versus two separate policiesfor each spouse.
There are also life insurance policieswhich can include long–term care insurancefeatures. Although these policies will costmore, with such coverage, long–term careexpenses will be covered if necessary,reducing the policy’s death benefit. Iflong–term care is never required, the policyowner’s beneficiary can receive the full deathbenefit upon the insured person’s death.
Long–term care insurance should bearranged well before the traditional ageof retirement, as the percentage of peoplewho are denied coverage increases amongolder applicants. Purchasing long–term careinsurance during your younger years, whileyou are still healthy, can help you ensure thatyou will be eligible for coverage as you getolder.
Protecting Your Assets
Another way to mitigate future health carecosts is to budget possible long–term carecosts into your long–range financial strategy,which will extend into your retirement years.In effect, this option amounts to self–insuringfor long–term care, as personal assets will beused to pay the bills.
Under certain circumstances, selffinancingcan be a viable option. Wealthyfamilies may be able to pay $70,000, $140,000or even $200,000 per year for long–term carewithout suffering a major decrease in networth. A move into a nursing home also maypermit the sale of one or more residences,freeing up cash for long–term care purposes.
However, it is important to consider thatsecuring adequate long–term care insurancecan protect a family’s assets from beingdissipated by an extended period of care. Thewealth that remains intact can provide a legacyfor a surviving spouse, children, grandchildren orfavorite charities.
Talk to your financial advisor about whetherpurchasing long–term care insurance makessense considering your individual circumstances,as well as how to evaluate which policy optionsmay work most effectively to preserve yourwealth.
Merrill Lynch and its representatives do notprovide tax, accounting or legal advice. Any taxstatements contained herein were not intendedor written to be used, and cannot be used for thepurpose of avoiding U.S. federal, state or local taxpenalties. Please consult your own independentadvisor as to any tax, accounting or legalstatements made herein.
Andrew J. Bucklee is Divisional Sales Manager,Merrill Lynch Wealth Structuring Group.
National Center for Health Statistics,National Vital Statistics Reports, vol. 52, No.3, Sept. 18, 2003; MetLife Mature MarketInstitute, Survey of Nursing Home and HomeCare Costs, Sept. 2004.
Employee Benefit News, Feb. 1, 2003.U.S. General Accounting Office, “WhereDoes the Population Live and Who Cares forThem,” Jan. 2001.
“Genworth Financial 2007 Cost of Care Survey:Nursing Homes, Assisted Living Facilitiesand Home Care Providers,” March2007.
National Center for Health Statistics,National Vital Statistics Reports, vol. 52, No.3, Sept. 18, 2003; MetLife Mature MarketInstitute, Survey of Nursing Home and HomeCare Costs, Sept. 2004
