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Will you be able to afford long-term care? 5 ways to prepare

by Richard Barrington

The cost of long-term care can quickly drain your nest egg. How can you plan ahead to make sure you don't run out of money?

"To long life" is a traditional blessing, but it may feel more like a curse for seniors struggling with the high cost of long-term care in their later years.

Long-term care can easily cost as much per month as the mortgage for an expensive home, only long-term care costs are indefinite. Whether you are a retiree who has yet to confront the challenge of paying for long-term care or a younger person still saving for retirement, it's critical that you account for this potential expense.

Long-term care: the financial challenge

There is a myth in financial planning circles that living expenses go down in retirement. That may be true in the first years of retirement, but your expenses can increase dramatically if long-term care enters the picture.

"Most families don't understand how quickly mom and dad's assets will go away when they have to go into assisted living or a nursing home," cautions Carol Bursack, editor-in-chief of ElderCareLink.com and author of the book "Minding Our Elders: Caregivers Share Their Personal Stories."

There are various levels of long-term care, but the numbers can be staggering at each. A study by Genworth Financial found the median cost of an assisted living facility to be $3,185 per month. Bump the level of care up to a nursing home, and this figure rises to over $5,500 per month. By the time you may need long-term care, this number may be significantly higher--since the cost of long-term care has been rising faster than the general inflation rate.

What are the odds that you'll face this challenge? Just do the math. The fastest-growing population group in the U.S. is people 85 and over. Among people 85 and over, more than half (about 55 percent) need some form of long-term care. If you are a woman, your longer average lifespan raises your chances of needing long-term care even more.

Medicare and Medicaid offer limited help, but typically only after your assets have been substantially depleted. Moreover, legislative changes could change the benefits available by the time your long-term care needs come into the picture.

To have more control over your long-term care, have a plan for paying for it privately for as long as possible.

Preparing for the cost of long-term care

Affording long-term care requires some advance planning. Working with a financial planner can help, but Bursack notes that this is a highly specialized area of financial planning: "Financial planners need to know Medicare and Medicaid law inside and out to do a good job for seniors."

There's no one-size-fits-all, but consider these five ideas that may help you save money for long-term care expenses in the long run:

  1. Refinance, then bank your mortgage windfall. Mortgage rates reached record lows in 2010 and remain at unusually low levels. This has created a refinancing windfall for many households, especially those who have been paying off their mortgage longer and have enough equity to do so. Tempting though it may be to spend the money that's no longer going to the mortgage servicing company, dedicate some or all of the savings to a special account earmarked for long-term care costs.
  2. In early retirement, plan to keep expenses at a minimum. With your children out of the home and with less inclination to go out and spend money, your living costs could be less in retirement than you'd budgeted for. You might want to put any drop in living expenses during the early years of retirement towards paying for long-term care in later years.
  3. Save your social security benefits. If you are well provided for through a combination of private savings and an employer-sponsored retirement plan, you may want to put your social security benefits into a war chest for potential long-term care costs.
  4. Buy long-term care insurance. "Long-term care insurance has come under more regulation and has gotten better," observes Bursack. She advises using an independent insurance agent who can offer policies from more than one company and checking out agents through your state's insurance commissioner. She also advises looking into this early: "The younger you are when you go to buy long-term care insurance, the more likely you are to be able to get it."
  5. Use in-home care or adult day care to remain at home for as long as possible. These options are much less expensive than full-time care, and some insurance policies or veterans' benefits may cover some or all of the cost.

As expensive as long-term care can be, it will seem even more expensive if it takes you by surprise. Some advance planning--and starting as early as possible--will help you be ready to meet the challenge of paying for long-term care.