Planning for Retirement Income to Cover Unfunded Healthcare Costs

The rising retirement healthcare costs can put a serious strain on your savings, especially when it comes to long-term care. The annual median cost of in-home care with a home health aide increased from $75,504 in 2023 to $77,792 in 2024. Assisted living saw a sharp 10% jump with rates rising from $64,200 to $70,800. Meanwhile, the cost of a private room in a nursing home surged from approximately $116,800 in 2023 to $127,750 in 2024. If you have not specifically set aside funds for these healthcare expenses, you may have to rely on unpaid care from family members. Some people try to manage their long-term care costs by using their emergency savings, but this approach could mean setting aside 40% to 50% of your total savings, which may not be sustainable. Since most long-term care expenses are not well covered by general health insurance, failing to plan ahead can create a major financial burden later in life.

This article explores different ways to prepare for long-term care costs so you can protect both your health and your retirement savings. You can also consult with a financial advisor who can help you build a strategy to cover your long-term healthcare costs in retirement.

Below are 4 things you can do to cover unfunded long-term healthcare costs in retirement:

1. Consider Medicaid long-term care

Planning for healthcare costs in retirement is essential as not all costs are fully covered by Medicare or traditional health insurance. Medicaid long-term care can be a suitable option. However, you must know how it works and whether you qualify for it. Medicaid long-term care can help older retirees and individuals with disabilities access essential services, including medical care and non-medical assistance with daily activities. These services can include basic day-to-day tasks like eating, bathing, using the toilet, dressing, transportation, housekeeping, etc. In addition, Medicaid may also cover costs for modifications made to your house to improve accessibility, such as installing a wheelchair ramp or bars/handles around the house for support.

Medicaid covers long-term care in various settings. This could be a person’s home, the home of a loved one, such as a child or grandchild, a nursing home, or an assisted living facility. However, the coverage for Medicaid can depend on state-specific guidelines, making it important to check your local Medicaid programs to understand the available services. To receive Medicaid long-term care benefits, you must demonstrate a need for continuous medical care and daily assistance. Medicaid can be used by those aged 65 or older or individuals with a permanent disability. However, states may use different assessment methods to determine whether an applicant meets the required level of care. Medicaid eligibility may also be based on your income and assets. The specific limits vary by state. However, most states set the following thresholds:

Income limits: Applicants must have a low monthly income, typically ranging between $1,000 and $3,000 per month, depending on the state and program. For couples, the combined limit is higher.
Asset limits: A single person should usually not have more than $2,000 in countable assets, while couples may qualify with $3,000 to $4,000. Additionally, not all assets are counted toward Medicaid eligibility. Some assets that are typically exempt include your primary residence, long-term care and term life insurance policies, vehicles, etc.

Medicaid long-term care includes different programs, such as:

Nursing Home Medicaid that provides full-time medical care and assistance in a nursing facility
Home and Community-Based Services (HCBS) Waivers that allow long-term care services at home in place of an institution
Aged, Blind, and Disabled (ABD) Medicaid that offers support for older people and individuals with disabilities who require long-term care

Each state determines the specific services covered under these programs.

It is important to note that while Medicaid can provide crucial support to cover your medical expenses in retirement, relying on it as the sole plan for long-term care can be risky. Realistically, Medicaid can only be accessed to cover long-term care costs once nearly all your other personal savings have been used. This makes it suitable only if you have exhausted all your savings. It does not provide upfront financial protection in the way that private health insurance does. In some states, Medicaid partnerships may allow you to benefit from both public and private assistance. However, most people rely on private long-term care insurance before turning to Medicaid.

2. Use a Health Savings Account (HSA)

An HSA is a savings plan designed to cover retirement healthcare costs, including long-term care. It offers multiple tax benefits, such as tax-deductible investments, tax-free growth over the years, and tax-free withdrawals, when used to cover qualified healthcare costs in retirement. Unlike some other tax-advantaged accounts, HSAs have no Required Minimum Distributions (RMDs), which allow funds to grow indefinitely until they are needed and withdrawn. This helps you keep your savings for the later years of retirement when you might need money to cover long-term care costs.

An HSA can be used to cover a wide range of long-term care expenses, including prescriptions, dental and vision care, and in-home caregiver services. The account can also help with long-term care needs, such as walkers, wheelchairs, home modifications, and even the costs of keeping service animals. If an individual has a Letter of Medical Necessity (LMN) from a doctor, they may also be able to use HSA funds for additional long-term care expenses like exercise and medical massage fees. HSAs can be particularly useful for paying long-term care insurance premiums, which can help cover the costs of assisted living, nursing homes, etc. Insurance premiums are generally not considered qualified healthcare expenses, but HSAs make an exception for long-term care insurance, Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation coverage, healthcare coverage while on unemployment, and Medicare for individuals aged 65 and older. HSAs also offer flexibility for family healthcare expenses. If a spouse has an HSA, they can make their partner an authorized user or beneficiary, allowing them to use the account for both individuals’ medical needs. HSAs can also be used by adult children who manage their parent’s healthcare expenses. However, in such cases, the adult child may need a durable power of attorney to access and manage the parent’s HSA funds for their healthcare expenses.

Additionally, HSAs make for a good choice for long-term care expenses as they allow you to invest your money. Since healthcare costs, particularly long-term care costs, are likely to rise in the future because of medical inflation, the investment component can help you build a sizable corpus. Moreover, employers can also contribute to an employee’s HSA, offering better financial support.

You can either withdraw your funds to cover your healthcare costs in retirement or roll over unused HSA funds indefinitely. Once you turn 65, HSA withdrawals for qualified medical expenses remain tax-free. However, if the money is used for non-qualified expenses, it will be subject to regular income tax, though the 20% penalty that applies to younger account holders is waived.

Despite its advantages, HSA may not be suitable for everyone. You need to be eligible to contribute to an HSA. To qualify, you need to be enrolled in a High-Deductible Health Plan (HDHP) and cannot have any other health coverage that is not HSA-eligible, such as a spouse’s employer-sponsored plan. Additionally, you cannot contribute to an HSA if you are enrolled in Medicare or if you have been claimed as a dependent on another taxpayer’s tax return. Understanding these requirements is essential and can help you plan ahead and maximize the benefits of an HSA for your future healthcare needs.

3. Opt for Home Equity Conversion Mortgage (HECM)

An HECM is a financial tool that allows retirees to use their home equity to cover long-term care expenses without having to sell their property. It is a type of reverse mortgage that is insured by the Federal Housing Administration (FHA) and provides older homeowners with cash while allowing them to remain in their homes. Unlike a traditional mortgage, a HECM does not require monthly repayments. Instead, the loan is repaid when you sell the home, move out permanently, or pass away. Homeowners can choose to receive a lump sum or fixed monthly payments through an HECM. You can also opt for a line of credit or a combination of all these options. The money can be used as a replacement to your retirement income or cover unexpected expenses, including long-term healthcare costs in retirement. Since long-term care can be expensive, using home equity through an HECM can be a practical way to fund in-home care, assisted living, or medical treatments without having to sell the house.

However, you must meet certain eligibility criteria to qualify for an HECM. You must be at least 62 years old, own the home or have substantial equity, and use the property as your primary residence. It is important to note that not all properties qualify for an HECM. Eligible homes include single-family residences, multi-unit properties where the borrower is living in one unit, FHA-approved condominiums, and certain manufactured homes that meet FHA standards. Additionally, you must have paid all property taxes with no dues. You also need to take care of the homeowner’s insurance and other necessary expenses associated with the home. And you are required to attend a consumer counseling session approved by the U.S. Department of Housing and Urban Development (HUD), so you understand the terms and implications of the loan.

While an HECM can provide you with financial security in your hour of need, it is essential to consider its long-term impact. A house is a generational asset that can be passed down to your children or grandchildren. However, since the HECM loan is repaid from the home’s sale proceeds, it can reduce the amount of inheritance left for your heirs. If your family members want to live in the house or keep it for themselves, they will need to repay the loan balance. This can be a financial burden. This is why some retirees may find that downsizing to a smaller home can be a better alternative. This can free up cash without the need to borrow against home equity. It also allows you to maintain control over your assets while still covering your long-term care costs. It is essential to weigh the pros and cons carefully and explore alternative options before making a decision. You may also discuss this with your estate attorney and children.

4. Use long-term care insurance

The most suitable choice to prepare for future healthcare costs is to invest in long-term care insurance. This type of insurance covers expenses related to long-term care services, including nursing homes, assisted living facilities, at-home care, etc. Having a dedicated insurance plan is necessary since these services can be extremely expensive. Long-term care insurance can be more affordable than paying for care out-of-pocket. While the cost of long-term care services can quickly drain your savings, insurance premiums tend to be significantly lower in comparison.

For example, at 75 and older, premiums typically range between $4,052 and $5,456 per year, which breaks down to approximately $337 to $455 per month. This is a fraction of what full-time care services would cost over an extended period. Without long-term care health insurance, you may be forced to rely on your personal savings, liquidate your assets, such as a home or rely on home equity with a reverse mortgage. You may also depend on family members for financial support. However, these burdens can be significantly reduced with long-term care insurance.

To conclude

According to the Health Department, nearly 20% of today’s 65-year-olds will require long-term care for more than five years in retirement. This makes planning for future healthcare costs necessary. Unlike some financial risks, the need for long-term care is both anticipated and, to some extent, inevitable as you age. Ignoring it could lead to significant financial distress and force you to use up your savings or rely on others for support. While there are multiple ways to prepare for these unfunded costs, selecting the best option for your needs is crucial. Since the best approach varies based on your personal circumstances, consulting a financial advisor can be highly beneficial. A financial advisor can assess your situation, explore various funding options, and help you understand how much you should budget for retirement healthcare to ensure financial stability in your golden years.

Use the free advisor match tool to get matched with seasoned financial advisor who can help you create a financial strategy to cover retirement healthcare costs. Answer some simple questions about your financial needs and get matched with 2 to 3 advisors who can best fulfill your financial requirements.