Proper Retirement Planning Avoids Underestimating Care Costs

Takeaways

• Many people misjudge how much they will need for retirement health care expenses.

• Failing to properly account for these costs can severely affect retirement security, leading to financial strain and potential reliance on government assistance.

It can be easy to underestimate the amount of money we will need for health care and long-term care after we retire. Not knowing exactly what care we will need and with the costs of all types of care rising, it is nearly impossible to know exactly how much to save and invest for retirement. Knowing this, one would think people would err on the side of caution and set aside more rather than less. However, the opposite appears to be true.

According to a 2024 study conducted by Jackson National Life Insurance Company and the Center for Retirement Research at Boston College, nearly two-thirds of pre-retired individuals surveyed are underestimating their expected retirement health care expenses. The survey also found that only 27 percent of those surveyed believe they will require long-term care, yet nearly three-quarters of people over 65 are likely to need such care.

Consequences of Underestimating Late-Life Care Costs

Failing to properly account for health care and long-term care costs can severely affect retirement security. Many retirees find themselves depleting their savings much faster than anticipated, forcing difficult financial and lifestyle adjustments. Some may need to rely on family members for financial or caregiving support, which can strain relationships and reduce overall quality of life.

In worst-case scenarios, retirees may be left with no option but to spend down their assets to qualify for Medicaid, limiting their choices in care facilities and services. This strategy can lead to a lower quality of care than one may expect or want. Spending down depletes a person’s assets to the point where they have almost nothing, which leaves nearly nothing to pass on to the next generation.

Strategies for Long-Term Care Planning

With proper planning, you can be better prepared for the health care and long-term care costs that you will likely have after you retire. To mitigate the risk of financial strain, consider the following planning strategies:

• Understand Medicare and Supplemental Insurance. Medicare doesn’t cover long-term care services, such as custodial care in a nursing home or home care assistance. Medigap policies and Medicare Advantage plans can help cover out-of-pocket medical costs. Consider a health savings account (HSA), if eligible, as funds can be used tax-free for medical expenses in retirement.
• Evaluate Long-Term Care Insurance. Traditional long-term care insurance policies can help cover costs but can be expensive. Hybrid policies, which combine life insurance with long-term care benefits, may offer more flexibility. The earlier the policy is purchased, the more affordable the premiums tend to be.
• Incorporate Health Care Costs into Retirement Savings Goals. Work with a financial planner to estimate expected health care expenses and incorporate them into a retirement plan. Consider conservative withdrawal strategies from retirement accounts to ensure funds last through potential medical expenses.
• Explore Government and Community-Based Programs. Medicaid may be an option for those with limited assets, but it requires careful asset planning. Veterans may qualify through the Department of Veterans Affairs for benefits that cover long-term care services. Some states offer programs to assist with in-home care, adult day services, or respite care.
• Plan for In-Home and Alternative Care Options. Home modifications and assistive technology can help individuals age in place and reduce the need for costly institutional care. Adult day services and caregiver support programs can provide affordable alternatives to full-time nursing home care.

Finding Help With Retirement Planning

To ensure a comfortable and financially secure retirement, take proactive steps to understand the true costs, explore insurance and savings options, and consider alternative care solutions. With careful planning, you can better navigate these expenses without jeopardizing your financial future. An experienced elder law attorney in your area can work with you to create a financial strategy that will help you pay for your long-term care while meeting your health care and long-term care needs.

For additional reading about issues relating to long-term care and retirement planning, check out the following articles:

• Older Adults Are Failing at Retirement Planning, Study Shows
• The Costs of the Rising Cost of Long-Term Care
• When Should You Purchase Long-Term Care Insurance?
• Maximize Social Security Benefits: 3 Unknown Strategies
• What Raising the Social Security Retirement Age Would Mean