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The Prohibitive Cost of Senior Care and How to Fund It

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If inflation has taught us anything, it’s that household budgets must leave room for higher prices. Two years ago, you may have been covering your living expenses easily. And today? You’re paying 10% or 12% more for groceries and services, but your income maybe grew 5% — if you are lucky.  

This dynamic of rising costs coupled with slower-growing income becomes more extreme in your senior years. Once you retire, your “raises” consist of Social Security cost-of-living adjustments and conservative increases in retirement withdrawals. You must manage inflation without work bonuses or job changes that deliver huge pay increases. 

Not only that, but your senior budget must include a notoriously challenging line item: long-term care costs. The challenge is twofold. One, senior care services are already expensive — some services cost nearly $10,000 monthly. And two, inflation is pushing those expenses higher every year. 

Projections from the Centers for Medicare and Medicaid Services show out-of-pocket home health costs rising by more than 100% between 2020 and 2030. Cumulative out-of-pocket payments for nursing homes will rise from $45.3 billion in 2020 to $58.3 billion in 2030. 

Even wealthy households will need a clear plan for funding their senior care costs without going broke in the process. Read on to learn the essential facts about senior care costs and six ways you can fund them. 

What is your retirement income?

The first step in planning for senior care costs is understanding your retirement income and how it relates to your retirement living expenses. If you will make more than you spend in retirement, for example, you can save the overage to help with your care costs. On the other hand, if your retirement budget just barely balances, you must start your care fund from ground zero.

For context, the 2021 median income for individuals aged 65 and older in the U.S. was $47,620, as reported by the U.S. Census Bureau.

How will your income compare? Let’s walk through estimating your income from Social Security, withdrawals from retirement accounts, pensions, and wages. 

1. Social Security 

You can view estimates of your Social Security benefits at different claiming ages by creating an account at my Social Security. Upon logging in, you’re likely to see Social Security benefits in the range of 30% to 40% of your working income. 

2. Withdrawals from retirement accounts 

The income available from your retirement accounts depends on how you’re invested and how old you are when you retire. If you’re invested 50% in equities and 50% in fixed income, for example, it’s safe to estimate an annual withdrawal rate of 4%, adjusted each year for inflation. At that withdrawal rate, you should remain solvent for at least 30 years. 

You would assume a lower annual withdrawal rate if you are invested in less than 50% equities. 

3. Pensions 

Pensions can be complicated. Talk with your pension administrator about estimating your income. Find out if you’ll get cost-of-living adjustments, a spousal benefit, or the option to take a lump sum payment instead of an income stream.  

4. Wages 

You may decide to keep working, either full-time or part-time in retirement. Assuming you will continue working in the same field, you can probably estimate your future wage income easily. 

There is another factor here, however. Social Security sets caps on income. If you exceed those caps while you are collecting Social Security, your benefits will be reduced. 

To avoid an income-related Social Security reduction, wait at least until your full retirement age to collect benefits. At your full retirement age, the income caps drop away. You can earn as much as you want even if you’re collecting Social Security at the same time.

Adding up your income sources 

Once you feel confident with your estimates for Social Security, retirement withdrawals, and other income sources, add them up. Compare that number to your cost of living today. 

Hopefully, your estimated income is 80% to 100% of your current living expenses. That usually means you are well positioned to move into retirement without a lifestyle downgrade — but it doesn’t leave much left for senior care costs.

What are the most common types of senior care? 

There are five primary types of senior care, which range in price from about $1,800 to nearly $10,000 monthly. Below we’ll review the specifics of each. 

Adult daycare 

Adult daycare is out-of-home, part-time supervision for seniors. These centers cater to seniors who can benefit from social interaction, physical activity (such as yoga classes or physical therapy), healthy meals and snacks, medication management, and medical oversight. Most adult daycare centers have a nurse on staff. 

Long-term care insurer Genworth estimates the 2023 monthly median cost of adult day healthcare at $1,793. Programs that are more socially oriented may be less expensive. Programs that specialize in certain conditions such as dementia will cost more. 

The advantages of adult daycare include: 

  • Adult daycare is more affordable than full-time senior care programs. 
  • Adult daycare provides social interaction, which promotes happiness and can delay cognitive decline. 
  • Adult daycare provides a safe environment for seniors so family caregivers can go to work.  
  • Adult daycare programs can help seniors achieve greater independence, which takes some pressure off family caregivers. 

The disadvantages of adult daycare are: 

  • Adult daycare is a part-time solution. These programs are typically open during regular business hours, though some may have extended hours into the evenings and weekends. Family members will take over the caregiving responsibilities at night. 
  • Not all seniors qualify for adult daycare programs. Facilities may require seniors to be continent, for example. Patients with advanced Alzheimer’s disease or serious physical or cognitive impairment may do better in an environment with closer medical supervision. 
  • Medicare generally does not cover the costs of adult daycare. The only possible exception is when the facility provides doctor-prescribed medical services.

Assisted living 

Assisted living is residential, community-oriented care that typically includes structured activities, nutritious meals, wellness programs, some medical oversight, and housekeeping. Seniors in assisted living facilities may have their own apartment or room, or they may share a room with another senior. 

The estimated median monthly cost for assisted living in 2023 is $4,774. As with adult daycare, assisted living communities that specialize in seniors with dementia are often more expensive. 

The advantages of assisted living include: 

  • Seniors in assisted living communities can get help with the activities of daily living (ADLs). These include bathing, grooming, dressing, taking medications, preparing meals, eating, and going to the bathroom. 
  • Assisted living communities can be a long-term solution. Seniors who are mobile and relatively independent may require less assistance initially. But if their condition declines, the on-site staff is usually equipped to manage the shift to greater supervision. 
  • Assisted living provides a residential, home-like atmosphere. Apartment- or dormitory-style living will be more comfortable than a clinical setting. 
  • While seniors in assisted living have access to supervision, they usually retain some independence to choose how they spend their time.
  • As with adult daycare, the community aspect of assisted living can help seniors retain social skills and cognitive function. 

A few of the disadvantages of assisted living are: 

  • Assisted living residents often don’t have complete privacy. They usually share common areas with other residents. They may also share rooms or bathrooms. 
  • Assisted living facilities have limited medical services on site. Residents who fall or cut themselves badly may need to be transferred elsewhere for treatment. 
  • The level of care can vary widely from one facility to the next. There is a greater chance for senior abuse and neglect in assisted living communities vs. an adult daycare center. 
  • Assisted living facilities have rules on curfews and visiting hours. These may be frustrating for seniors who are used to having their independence. 
  • Medicare does not pay for assisted living. 

Custodial at-home care 

Custodial at-home care is non-medical support provided in the home by an unlicensed caregiver. These caregivers are not medically trained, but they are equipped to help seniors bathe, groom, get dressed, eat, move around, and use the bathroom. Home health aides may also provide light housekeeping duties. 

The median monthly cost for a full-time, in-home caregiver in 2023 is estimated to be $5,259. Your cost could be higher or lower depending on where you live. In California, for example, the median rises to $6,473. In Alabama, the median cost is lower at $4,045.

The advantages of custodial at-home care are: 

  • Seniors can stay in their homes where they are most comfortable. 
  • Your physician may recommend a custodial caregiver, but you do not need a prescription to hire one. 
  • You can schedule a caregiver for as few or as many hours as you need. 
  • Caregivers provide companionship as well as supervision. 

The disadvantages of custodial care include: 

  • Custodial care is not appropriate for seniors who need medical supervision. 
  • Caregiving is a demanding job and turnover is common. A change in caregivers can be stressful and disruptive. 
  • Custodial care can get expensive for seniors who need full-time attention. 
  • Medicare does not pay for custodial care. 

At-home healthcare

At-home healthcare is provided by home health aides, who must meet their state’s training and certification requirements. Home health aides usually offer the same services as custodial caregivers, plus monitoring of vital signs and the senior’s mental and physical condition.  

Nationwide, the median monthly cost for home health aides in 2023 is an estimated $5,148. As with other healthcare services, your zip code can push this cost higher or lower. 

The main advantages of at-home healthcare are: 

  • At-home healthcare is less expensive than out-of-home supervision. 
  • Home health aides usually communicate with the senior’s physician, which helps the physician make better care decisions. 
  • Home health aides are trained to respond to health emergencies, such as a fall or heart attack. 
  • Medicare may pay for part-time or intermittent home health services if they are prescribed by a doctor. 

The disadvantages of at-home healthcare are similar to those outlined for custodial at-home care. You may have trouble finding and keeping the right home health aide. Also, some seniors may need more medical supervision than a home health aide can provide.   

Nursing home 

Nursing homes provide residential care that includes custodial services, medical supervision, therapy, and rehabilitation services. Of the senior care options, nursing homes provide the most extensive medical oversight and expertise.

Nursing homes are also the most expensive form of senior care. The estimated median monthly costs in 2023 range from $8,390 to $9,584, depending on whether the senior has a shared room or private room. 

The primary advantage of nursing home care is the access to medical care. Staffed, on-site medical teams can help seniors recover from injuries or short-term illnesses, without the expense of a hospital stay. When conditions are chronic, seniors have around-the-clock supervision to keep them comfortable.  

The disadvantages of nursing home care include:

  • The environment is clinical and, often, depressing. Seniors will not experience the comforts of home during their nursing home stay. 
  • The cost of nursing home care is prohibitive. Medicare generally does not pay for these services.
  • Seniors in a nursing home have little freedom, privacy, or independence. 

How can retirees fund the costs associated with senior care? 

Even part-time or temporary care costs will strain your retirement budget unless you have a plan. That plan can incorporate one or more of these common care funding sources: your personal funds, life insurance, long-term care or assisted living insurance, VA benefits, Medicare, and Medicaid. Let’s look at each one. 

1. Out of pocket

Many seniors pay for their care from their own resources. Unfortunately, if your retirement budget is barely breaking even, this requires downsizing other expenses. You might move in with an adult child, for example, to cut back your housing costs. 

You might also raise a one-time sum of cash by borrowing against your home equity with a reverse mortgage or home equity loan.  

2. Life insurance

Like your home, life insurance may also be a funding source. If you have permanent life insurance, you likely have the option to borrow against your cash value. Or, if you are terminally ill, you may be able to advance part of your death benefit while you are living. 

A more lucrative option is to sell your life insurance outright in a life settlement. A life settlement transfers your coverage and death benefit to a new owner, who subsequently pays the premiums. You receive a lump sum of cash in the process. 

One report from the London Business School estimates that life settlements produce four times more cash for the policyholder than surrendering the policy for its cash value. 

3. Long-term care/assisted living insurance 

You can also purchase insurance that covers a portion of long-term care costs. These policies are most affordable if you buy them at a young age. If you are near retirement or already experiencing health problems, the premiums can be prohibitive. 

Know that long-term care insurance does not provide unlimited coverage. Typically, the policy will specify a maximum daily coverage amount and a maximum number of days eligible for reimbursement. 

4. VA benefits 

In some situations, VA will help pay for long-term care services. That includes nursing home stays, assisted-living programs, in-home care, and adult day healthcare. To be eligible, you must be already signed up for VA healthcare and a physician must prescribe the services. To learn more, contact your VA social worker. 

If you are not receiving VA health services currently but are potentially eligible, apply for benefits at va.gov. 

5. Medicare 

As noted, Medicare doesn’t typically cover senior care costs. There are some exceptions, which usually involve short-term, doctor-prescribed services. As an example, Medicare may partially cover a short-term stay in a skilled nursing facility or rehabilitation center. The main requirement is that a doctor prescribed the stay after you were treated as an inpatient in a hospital for at least three days.

6. Medicaid 

In 2020, Medicaid paid for 42% of long-term care costs in the U.S. If you are eligible for Medicaid, the state-run program could be a good funding source for everything from in-home custodial care to a nursing home stay. 

Unfortunately, the eligibility requirements for Medicaid are very strict. You can earn less than the federal poverty limit and still make too much to qualify for Medicaid. 

You can “spend-down” your assets to qualify for Medicaid, but this is not a strategy to pursue on your own. Talk to a trusted Medicaid expert and your financial advisor before proceeding. The potential complications of this strategy may not be worth it. 

Funding senior care costs 

Senior care costs are pricey today and getting more expensive every year. Whether you need in-home or out-of-home care, the cost is likely to strain your finances. Most seniors will fund these expenses out-of-pocket or through insurance, life settlements, VA benefits, or Medicaid. 

If you expect to have a funding shortage for care costs, tackle it from multiple angles. You might save and invest an amount monthly as self-insurance, upgrade your permanent life insurance, and purchase an affordable long-term care plan (if you’re young enough today). 

No matter how you structure your funding plan, start now. The earlier you can earmark funds for senior care, the more flexibility you’ll have later. 

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My name is Lucas Siegel, and I’m the CEO of Harbor Life Settlements & Harbor Life Brokerage. Since its launch in early 2020, Harbor Life Online Exchange has listed hundreds of millions in life insurance policies for sale and has been pivotal in transforming the industry standard. I’ve always been captivated by finance and passionate about disrupting traditional verticals such as the life settlement industry.

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