Apart from inadequate savings and a reduced Social Security benefit, declining health that requires long-term care was the most frequently cited retirement fear among Americans in an updated Transamerica survey we looked at in December. That is encouraging because it is important for pre-retirees to be aware of this growing old-age financial challenge so that they can start to prepare for it while they are still young. Indeed, as a review long-term care has to do with the services and supports necessary to meet health or personal care needs over an extended period, e.g. care for chronic illnesses or disabilities.
The U.S. Department of Health & Human Services estimates that an American turning age 65 today has almost a 70 percent chance of needing long-term care services at some point in the future, and these expenses can be substantial. Just look at the most recent data from Genworth which showed that the median annual cost for a private room at a nursing home exceeded $100,000 for the third year in a row in 2020. That could jump to $191,177 over the next two decades, assuming a conservative 3 percent inflation rate. What is worse is that these and other LTC expenses can vary significantly based on where you live, e.g. the median annual cost for just a semi-private room at a nursing home in Connecticut last year was $155,125, compared to $78,475 in Alabama. Further, although the average nursing home stay is “only” two years, according to recent academic research, 1 in 20 individuals have stays of four years or longer. Those are just a few examples of potential long-term care costs that by any measure are major outlays that could easily take a big chunk out of your retirement nest egg.
Fortunately, tools are available to help Americans prepare for these expenses, such as a health savings account (HSA). Contributions to these vehicles are deductible from taxable income, contributions can grow (from interest or other capital earnings) tax free, and withdrawals are tax exempt if used for qualified medical expenses. Even better, contributed funds roll over and accumulate year-to-year if they are not spent, therefore making HSAs a powerful tool for growing your overall savings. An earlier EBRI study, for instance, estimated that an individual who saves in an HSA for just 10 years could accumulate between $53,000 and $68,000, depending on the rate of return realized and on the contribution rates assumed, and as much as $1.1 million over a 40-year horizon. However, a newer EBRI report found that only 6 percent of HSA owners actually invest their money, while the rest simply leave their account balances in cash, thereby missing out on potential growth opportunities and tax savings.
Sources: TCRS, U.S. HHS, Genworth, EBRI