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Long-term care: Ignore it at your own peril

(MoneyWatch) Planning for a retirement that can last 20 or 30 years is an ambitious task. You need  reliable sources of retirement income that will cover your living expenses for the rest of your life, no matter how long you live, making sure you factor in future inflation, too.

If you've done a good job with this difficult task, congratulations! But you're not finished yet. There's one more step to this task: Protect your good plans from getting blown up by potentially ruinous long-term care expenses.

Welcome to Week 14 of my series, 16 weeks to plan your retirement. It's time to review just what you need to do to protect your assets from being depleted by long-term-care expenses, which can cost $50,000 or more every year. At that rate, it won't take long to wipe out your retirement savings.

How real is this threat? If you want to know the odds, review my previous post, Long-term care: What are the real risks? But if you want to really understand the potential for disaster, ask your 50-something or 60-something friends if they've had to deal with long-term care for their parents. Chances are, you'll find at least one friend -- and probably more -- who's either had to provide care themselves or arrange for care and/or had to pay for it. Ask your friends about the financial burden and the strain it puts on their lives. I bet you'll get an earful about careers put on hold, the lack of time for family and outside interests, arguments with siblings and spouses, and sleepless nights filled with anxiety about making the money last.

My wife and I have both had to deal with these issues. She experienced all of the above with her mother and  eventually paid significant amounts for her mother's care when her mother's money ran out. My father also needed long-term care in his later years; my mother was the main caretaker, helped by her kids, grandkids and, eventually, paid in-home help. We both gladly pitched in to care of our parents -- it was simply the right thing to do. But our experience also motivated us to prevent this from happening to ourselves and to help eliminate the resulting strain on our children.

First, a dose of reality. Long-term-care expenses are typically for custodial services: assistance with daily living activities when you're unable or too frail to prepare food, bathe or use the bathroom on your own; get dressed; or follow medical directives. Long-term-care expenses aren't medical expenses, so they aren't covered by Medicare or most medical insurance plans. The only exception is the care you receive when you're released from the hospital and admitted directly to a skilled nursing facility for rehabilitation following an injury or serious illness.

So how to prepare for this serious threat? Most importantly, adopt a strategy to pay for long-term-care expenses. Don't hide your head in the sand and pretend it can't happen to you. If you do nothing, you're gambling that your family or public assistance will take care of you if you ever need long-term care. But rolling the dice is not a good strategy!

There's not one magic bullet that will easily or cheaply address the threat of long-term-care expenses. If you want to protect yourself, consider one or more of the following:

  • Be very serious about taking care of your health to minimize the odds that you'll eventually need long-term care.
  • Buy long-term-care insurance. If the premiums are too high for your budget, consider buying "catastrophic" insurance or a policy that will pay for some, but not all, of the potential expenses. Some insurance is better than none. Look for ways to reduce your premium costs. Long-term care insurance costs less if you start the policy at an early age. And in some cases, you can buy long-term care insurance through your employer at rates that are more favorable than if you bought it on your own.
  • Maintain a reserve of savings that's dedicated to long-term care and won't be used for generating retirement income.
  • Keep yourhome equity in reserve for the day when you might need long-term care. At that time, you might take out a reverse mortgage or home equity loan. Keep your home debt-free, and don't take out a reverse mortgage to generate retirement income until you need it for long-term care.
  • Stay on good terms with your kids! Even if you've taken care of paying for long-term care expenses, most likely they'll care about your well-being and will be involved with planning and arranging for your care.

Sit down with your spouse when developing your strategies, and tell your children and close relatives about your plans. This way, they all know your objectives and can carry out your wishes in the event you are unable to tell them.

If you're thinking about tapping your home equity to generate retirement income or taking out a reverse mortgage, you may want to reconsider this strategy if you don't buy long-term care insurance. Instead, you might want to keep your home equity in reserve to pay for long-term-care expenses, as noted above.

On the other hand, if you buy long-term-care insurance, you'll need to include the premiums in your budget for living expenses, since you'll most likely pay these premiums for the rest of your life.

One more thing: This is a very serious issue for women's retirement planning. When you visit a long-term-care institution, you'll see that most residents are women. That's because women typically outlive their husbands and then have no one to care for them. Also, the wife is often the primary caretaker if the husband needs long-term care, which can be quite a strain, sometimes pushing the wife into a facility soon after a husband passes away.

Planning for long-term care may not be the most inspiring part of your retirement planning, but it's something you can't afford to ignore. If you address this very real threat, you can have some peace of mind about the future, which lets you enjoy what you really want to do in your retirement.

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