(Editor’s Note: This article is part of Next Avenue’s 2015 Influencers in Aging project honoring 50 people changing how we age and think about aging.)
There are many uncertainties in retirement. For example, we don’t know how long we are going to live, what the interest rates will be or how the stock market will behave. But one thing is nearly certain: our health will decline as we age.
That means at some point, most of us will face serious functional limitations and, in the event of serious health shocks, maybe even permanent disability. As a result, a large number of older Americans might require professional medical care at home or in institutions such as nursing homes. But there is a lack of awareness about the risk of long-term care because of two big misconceptions surrounding the topic.
Misconception No. 1: Very few people end up using long-term care. This study by researchers from the National Bureau of Economic Research estimates that a 50-year-old has a 53 to 59 percent chance of entering a nursing home during his or her lifetime.
Custodial care, which is the most common form of long-term care provided by nursing homes, is not covered by Medicare.
In a recent study by the Employee Benefit Research Institute (EBRI), where I work, we found that between 2010 and 2012, nearly a quarter (23 percent) of those at or above age 85 recorded overnight stays in a nursing home facility. This number may not seem too high, but it is only for those who survived the entire two-year period of the study. When we analyzed the sample of only those who died during the same two-year period, the corresponding number was 62 percent.
Misconception No. 2: Medicare pays for all long-term care needs. Medicare covers some part of nursing-home expenses up to 100 days, but only in a skilled nursing facility and the nursing-home stay must be preceded by a qualifying hospital stay of more than three consecutive days.
Custodial care (nonmedical assistance, typically for activities of daily living such as bathing, eating and dressing), which is the most common form of long-term care provided by nursing homes, is not covered by Medicare.
Medicaid pays for such care, but families typically must exhaust nearly all of their income and assets to qualify. As a result, Medicaid is the long-term care coverage of last resort for those with no assets.
The High Cost of Long-Term Care
The truth is, long-term care is very expensive. According to a John Hancock national study of long-term care costs, in 2013, the average annual cost of care in the U.S. was $94,170 for a private room in a nursing home ($82,855 for a semi-private room); $41,124 for an assisted living facility and $18,460 for adult day care. The average annual cost of care received at home was approximately $29,640.
In the EBRI study mentioned above, during the two-year period examined, households with a member aged 85 or above spent an average of $24,185 out-of-pocket for long-term care expenses. But the households in the top 10 percent of nursing-home spending spent more than $66,600.
Long-term care costs are probably most concerning for middle-income households. High-income households may be able to self-insure and low- income households may not have enough assets to protect, so Medicaid will likely cover their expenses.
According to EBRI’s Retirement Security Projection Model predictions, 89 percent of households in the second-income quartile will not run short of money in retirement if these unpredictable health care costs are ignored. However, if these costs are included, only 42 percent of households in that income group won’t run short of money, based on projections.
Planning to Buy Protection
A possible solution for those who want to protect their assets from the risk of the costs of long-term care: long-term care insurance.
Premiums for this coverage vary depending on factors such as the age when the policy is bought, the extent of the coverage, the waiting period before benefits begin, inflation protection and where you live. But they can be expensive.
So, future retirees need to plan carefully if they want the protection of long-term care insurance.