Only a Sliver of Retirees Can Cover This Overlooked Expense

Editor's Note: This story originally appeared on SmartAsset.com.

Long-term care is a wide-ranging and often-overlooked component of retirement planning. It runs the gamut from occasional help with cooking and cleaning to around-the-clock care provided in a nursing home setting. While analysis from the Center for Retirement Research at Boston College shows that nearly 1 in 5 retirees won’t need any long-term services and supports, a large percentage of people who do need this type of care will struggle to pay for it. In fact, more than a third of retirees won’t be able to pay for even minimal needs, like hiring someone to help prepare meals, without running out of money.

What Is Long-Term Care and Who Needs it?

Long-term care includes a broad range of services aimed to meet an individual’s personal and medical needs. This may include homemaker services that help an aging person with tasks like cooking and cleaning, as well as the more intensive care provided in-home or at a nursing facility.

But not all long-term care is provided by paid professionals. In fact, unpaid informal care provided by family members is more common than formal care that’s financed either out-of-pocket, through long-term care insurance or Medicaid, according to a recent CRR brief titled “What Resources Do Retirees Have for Long-Term Services & Supports?”

In studying long-term care, CRR researchers classify a person’s needs as “minimal,” “moderate,” or “severe” based on the intensity and duration of the care that’s required. Here’s a look at each classification:

• Minimal: A person with minimal care needs requires help with instrumental activities of daily living (IADL), like shopping or preparing meals. A person may also qualify as having minimal care needs if they require up to one year of help with a more essential daily task (known as activities of daily living or ADL), like bathing, eating, or going to the bathroom.
• Moderate: An individual needing moderate care requires one to three years’ worth of help with one ADL. Those who have dementia or need help with two or more activities of daily life for up to three years are also considered to have moderate care needs.
• Severe: Lastly, a person who requires severe care needs more than three years of help with at least one ADL or has dementia for more than three years.

The good news is that not everyone will need long-term services and support. CRR data indicates that around 17% of retirees won’t need any long-term care. However, the flip side is that approximately 24% will have severe needs, with the remaining retirees needing either minimal or moderate care.

Who Can Afford Long-Term Care?

The cost of long-term care varies based on the services that are required and the state in which they are delivered. For instance, the median cost of a home health aide in California is over $5,500 per month, according to Genworth. The same service is more than $2,000 cheaper per month in Alabama.

The CRR study found that 26% of retirees can cover severe care needs for at least five years by relying on income, financial assets, and family caregivers. But 27% of retirees can’t even cover minimal care needs.

However, the authors of the study note these figures may underestimate the financial and family resources available. “Providing care, especially high-intensity care over long periods, can have negative effects on the physical and emotional health of caregivers; and individuals may not be willing to deplete their entire financial reserves, leaving no buffer for emergencies.”

By changing their methodology to consider the physical and emotional health of informal caregivers, as well as leaving retirees with 20% of their financial assets intact, CRR researchers found the percentages of people who can afford care is even lower.

Under these revised parameters, 36% of retirees cannot afford even minimal care without exhausting their resources. The percentage of people who can cover severe needs for at least five years also falls from 26% to 21%. This means only 1 in 5 retirees can cover severe long-term care needs without depleting 80% of their financial assets.

How to Better Plan for Long-Term Care

Paying for long-term care, even the most basic of services, can seriously eat into one’s retirement nest egg. According to Genworth, the annual median cost of a home health aide in the United States in 2020 was $54,912 and $53,768 for a homemaker. Meanwhile, the median annual price of assisted living facilities has risen more than 79% since 2004, reaching $51,600 in 2020.

Planning for these potential expenses is key. Beyond saving specifically for future care, long-term care insurance is one option for ensuring your future care is covered. This brand of insurance is the same as any other insurance product. You pay premiums in exchange for a benefit later in life that can be used to pay for covered services. These services typically fall into three categories: home care, assisted living, and skilled nursing.

Different policies may cover different types of long-term care services. Hybrid policies may allow you to collect life insurance benefits if you end up not needing long-term care.

Medicare and Medicaid may also help cover certain costs, but the scope of these government safety nets is limited. For instance, Medicare covers part-time or intermittent home health aide services if they are needed to maintain a person’s health or treat an illness or injury. However, Medicare does not pay for health aide services unless a patient is also receiving skilled care.

Bottom Line

A study from the Center for Retirement Research at Boston College found that only a fifth of retirees can truly afford severe long-term care needs, like extended help with everyday essentials (eating, using the bathroom, etc.). Meanwhile, more than a third of retirees won’t be able to afford even minimal care, like hiring someone to help prepare meals. Saving for long-term care early on can help offset these potential costs, while investing in long-term care insurance can also help pay for future needs.