Entering long-term care or a nursing home is quickly becoming a reality for many as they age. But as it becomes increasingly common, it's also becoming increasingly expensive.
Even with these staggering costs, long-term care planning is often overlooked, and many of these costs aren't usually covered under Medicare. Planning ahead should not be a small part of your retirement plan; it's an important way to ensure you can spend your golden years protecting your assets.
1. Contribute to an HSA
Contributing funds to a health savings account (HSA) is a powerful but often overlooked tool. The flexibility of these accounts is what makes them so valuable. People contribute to an HSA to offset current healthcare expenses, but the balance carries over each year, which means that money can also be invested for the future.
These accounts are a tax-advantaged savings vehicle that you can use at any age to pay for qualifying healthcare expenses. Your funds grow tax-free over time, and you can withdraw money tax-free for qualified expenses.
What are the qualified expenses you can use your HSA for, and what are the limitations?
Qualified HSA expenses:
- Long-term care insurance premiums
- In-home care services
- Nursing home or assisted living services
- Prescription medications
- Qualified services such as hospice
- Medical or mobility equipment
What isn't covered by HSA expenses:
- Room and board at a nursing home
- Services covered by insurance or Medicare
- Recreational activities such as golf, gardening or group exercise classes
2. Maximize Social Security
Making the most of your Social Security can be a strategic way to help cover long-term costs because it can create a larger income stream that you can rely on later in life.
One of the best ways to do this is by delaying when and how you take your Social Security. If you take it before you hit full retirement age (66 or 67, depending on the year you were born), your benefit is permanently reduced. If you can wait to claim, you'll increase your monthly benefit by 8% each year until you turn 70.
That higher paycheck each month can make a significant difference if you're faced with paying for long-term care in retirement. Unlike other investments you might have, Social Security is not impacted by the market, making it a much more stable income for covering future expenses.
A larger Social Security payment can help reduce the amount you need to withdraw from any other retirement or savings accounts you plan to rely on in retirement. This allows you to use those accounts for fun things you plan in retirement such as travel or hobbies.
While you shouldn't rely on Social Security benefits to cover the entire costs of long-term care expenses, maximizing them can help reduce the stress of paying for them out of pocket.
3. Explore long-term care insurance
If contributing to an HSA or using your Social Security benefits isn't the right strategy for you, long-term care insurance might be the next best thing.
It's crucial to understand how it works, as regular health insurance doesn't cover long-term care, and Medicare alone won't be enough. Explore your options to figure out whether a traditional or hybrid policy makes sense.
Traditional long-term care insurance policies typically come with annual premiums for life, while hybrid policies might allow you to draw down or accelerate the death benefit amount. Having long-term care insurance gives you more control over the type of care you receive, instead of being limited by how much you can spend out of pocket.
4. Start the conversation with family
Whether you're the one who will need it in the future or you have an aging parent who needs it soon, talking about long-term care or nursing home costs can be one of the most important conversations families can have.
Unfortunately, it's one of the biggest topics that many avoid. But if you wait too long, your family could face a lot of unnecessary headaches. Make sure the time is right. Find a calm, comfortable and private space to start talking and make sure you create a checklist of everything you want to cover.
If you're bringing this up for a family member who needs this care, make sure they know you're coming from a place of love, not judgment. It can be uncomfortable to bring it up, but it's a good idea to have those conversations before you're forced to by circumstance.
As Americans continue to live longer, the chances of needing long-term care is becoming more of a reality. Today's 65-year-olds have a 70% chance of needing long-term care in the future. While this is an important part of retirement planning, it can be overwhelming. Don't be afraid to ask for help. A financial adviser can sit down with you and determine which strategy for long-term care planning is right for you.
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This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
