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Ill Prepared for Long-Term Health Care

Without proper planning, the cost of health care will create a hardship on a majority of retiring baby boomers

The high cost of long-term health care will drag down the quality of life for nearly two-thirds of today's retirees. It can cost $77,000 a year for a nursing home room and $20,000 for in-home care, expenses that many people are ill prepared to absorb, said the Center for Retirement Research at Boston College.

A new analysis shows that when the cost of health care and long-term care is included, 64% of retirees likely will be unable to maintain the lifestyle they had before retirement.

"This is the No. 1 issue staring us in the face over the next decade," said Paul Ballew, a senior vice-president at Nationwide Mutual Insurance Co., which provided a grant to fund the study.

The cost of health care will create such an unexpected hardship on unprepared retiring baby boomers that it's imperative to sound the warning now, said Alicia Munnell, director of the Center for Retirement Research.

The stock market collapse that has whacked retirement savings for millions of workers has focused attention on how poorly people are prepared for retirement expenses, she said.

Underscoring a Harsh Reality

Munnell has been concerned for years about the impending retirement crisis caused by a combination of problems. They include inadequate personal savings, a Social Security system that will likely fail to provide current levels of support, and rapidly rising health-care costs.

Health-care costs rose nearly 7% last year after costing a total of $2.4 trillion in 2007, about $7,900 per person, says the nonprofit National Coalition on Health Care.

"My thought was that nothing was going to happen until the first generation of people retired without enough money and congressmen would see their parents living on just too little and people would be motivated to do something," Munnell said. "The financial crisis really accelerated that process."

The study illustrates the harsh reality that spending too much, borrowing excessively, and saving too little has left a generation unprepared for retirement, Ballew said.

"We've had a 20-year run of very aggressive consumption and a nice 20-year run of high levels of indebtedness, and now we're faced with a period where there's going to have to be some behavioral changes," he said. "We're now staring into a decade or two where we have to see restraint from consumption to derive savings."

The Long-Term Care Insurance Option

Options for paying for such care include relying on Medicaid, buying long-term care insurance, selling the family home when long-term care is needed, or tapping into the value of the home through a reverse mortgage.

Medicaid is the most likely option for the poorest retirees, Munnell said. Although in some cases these individuals may be able to extract some of the value of their home to help pay costs.

People with higher incomes likely would prefer to buy insurance, which can cost about $3,500 a year if acquired at age 65. Delaying the purchase increases the price. By age 75, a policy could cost around $600 a month, she said.

About 48% of long-term care recipients and their families pay long-term care costs out of their own pockets, says the American Council of Life Insurers. About 41% qualify for Medicaid. Another 8% are getting temporary coverage provided by Medicare and only 3% are paying with private long-term care insurance.

Several factors may play into why so few people buy long-term care insurance. They include the cost and the fact that an insurance industry study found that 20% of applicants are denied coverage because of poor health.

Standalone long-term care insurance policies vary greatly in their features. Some have caps on how much they pay and limits on the length of service, and they may not be fully adjusted for inflation, Munnell said.

In-Home or Nursing Home Care

Other options have been developed by the industry in the past few years, including life insurance policies and fixed annuities that carry long-term health-care riders. Those products cost more than straight insurance polices, but offer guaranteed payout to beneficiaries upon death in addition to providing long-term health-care coverage if it's needed.

Long-term care for some means in-home assistance with shopping, cooking, housework, and other basic duties, but for others it could mean a stay in a nursing home.

Current estimates indicate that one-third of people aged 65 today will need to enter a nursing home for at least three months. Some will need to stay for a prolonged period of time.

The costs are high. Hiring a home health aide for four hours a day, five days a week costs nearly $20,000 a year. The cost of a private nursing home is $77,000.

Overall, long-term care costs exceed $100 billion a year, says the Centers for Medicare and Medicaid.

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