They badly underestimate the cost of nursing home care.
Baby boomers are out of touch with the real costs of long-term care — and the likelihood they will need it.
Seventy-two percent of boomers incorrectly assume that the Affordable Care Act will cover the costs of long-term care, according to a study released Tuesday by Nationwide Financial Retirement Institute, which surveyed 801 boomers with household incomes of $150,000 or more.
Moreover, while only 24% of participants over 40 believe they will need long-term care in the future, more than 70% of retirees actually will, according to the AP-NORC Center for Public Affairs Research and the Nationwide study, respectively.
The result is that baby boomers vastly underestimate the costs of long-term care. The typical boomer expects long-term care to cost only $36,220 annually, according to the study.
The average cost of a year in a nursing home, which is the most expensive long-term-care option, is $265,000.
To make matters worse, the amount boomers expect to pay has declined by more than half since 2012.
“We think that this dramatic decline in the expected cost of care is due to a misunderstanding of the Affordable Care Act,” said Kevin McGarry, director of Nationwide Financial Retirement Institute.
Failing to set aside money for long-term care can force retirees into highly undesirable situations.
More than half of boomers say they would rather die than live in a nursing home, and about three-quarters would prefer to receive long-term care at home, according to the study.
But boomers who fail to save up may be forced to cover long-term care costs using Medicaid, which only kicks in if the recipient is staying in a nursing home — and the family must first run down its assets to $113,000 or less. “There is a misconception among a lot of folks who say 'I'll just use Medicaid,'” Mr. McGarry said. “People who are married need to think about the standard of living for the spouse who's not in the nursing home. If you run down all your assets, you have really impacted your spouse.”
There are two main strategies for avoiding this outcome, Mr. McGarry said.
The first is to use a traditional long-term-care policy. This approach offers the most long-term-care per dollar put in today, he said.
Nationwide estimated that the present-day cost for a woman of 60 for a plan that would pay out $285,000 in long-term care would be $100,000.
Another option is a life insurance policy with a long-term-care feature. This allows policyholders to cash out a portion of life insurance benefits to cover the costs of care and then pass the remainder on to loved ones.
Nationwide Financial sells versions of both of these products.
The costs of either of these types of plans varies, depending on a number of factors, including location and family health history, Mr. McGarry said.
Less affluent baby boomers should still consider these plans, he said. But they should also learn more about Medicaid so that if they do need to run down their assets they can plan a smooth transition.
“Baby boomers ought to sit with their adviser and figure out an approach that is right for them,” Mr. McGarry said. “If you don't plan appropriately, you might end up somewhere you don't want to be.”
