Planning for retirement isn’t easy, especially when there are so many costs to consider. Not only do you need to think about your general living expenses, but you’ll also need to plan for any travel or vacations, hobbies and entertainment, and healthcare and medical costs.
There’s one expense in particular, though, that can bust your budget wide open. And if you’re not planning for it, it could cost you nearly a quarter of a million dollars.
The major expense you may not be planning for
There are plenty of costs to prepare for in retirement, but there’s an incredibly expensive one you may not even be considering right now: Long-term care.
Nobody wants to think about the final years of their life before they’ve even retired, but because long-term care can be incredibly expensive, it’s a good idea to start planning for it now.
The average semi-private room in a nursing home will run you about $6,844 per month, according to research from the U.S. Department of Health and Human Services. That adds up to a whopping $82,128 per year.
In addition, among those who require long-term care, the average person needs it for around three years. If you spend three years in a nursing home that costs $82,128 per year, that comes out to a total cost of $246,384.
Finally, keep in mind that around 70% of seniors will need long-term care at some point, the Department of Health and Human Services found. Medicare also typically doesn’t cover this cost, so you’ll likely be on your own to foot this enormous bill. That means if you’re not currently accounting for long-term care in your budget, it might be time to start.
How to prepare for long-term care costs
Long-term care can be one of the most challenging costs to plan for, because you don’t know how much care you’ll need or whether you’ll even need it at all. But if you don’t plan for it, you could be slammed with a massive bill you’re not prepared for.
One option is to simply save more in your retirement fund to account for this cost. While you may not know exactly how much you’ll need to save to cover long-term care costs, setting aside as much as you can specifically for this expense can make it easier to afford later in life.
Saving an extra quarter of a million dollars isn’t easy, however, and it may not be feasible for many workers. In that case, long-term care insurance may be a better choice. You’ll need to enroll relatively early in life (ideally before you even retire) and premiums aren’t cheap. In fact, the average 55-year-old couple pays more than $3,000 per year in premiums, and depending on what type of coverage you buy, you may still be responsible for some out-of-pocket costs even with insurance.
However, long-term care insurance can significantly defray the costs, and considering 30 years’ worth of premiums is roughly the same cost as just one year of long-term care,on average, you can potentially save loads of cash by opting for insurance.
Finally, one more option is to take advantage of a health savings account (HSA). HSAs are like retirement funds exclusively for healthcare expenses, and they offer a triple tax advantage. Not only are your initial contributions tax-deductible and your savings grow tax-deferred, but your withdrawals are also tax-free if you spend the money on eligible medical expenses — such as long-term care.
The caveat to opening an HSA is that you need to be enrolled in a high-deductible healthcare plan, but if you qualify for this type of account, you can prepare for long-term care costs and save money on taxes at the same time.
Don’t let long-term care costs wreck your retirement
Long-term care is expensive, but it may be unavoidable later in life. Even if you can’t afford to save an additional quarter of a million dollars, every little bit counts. It can be difficult to prepare for this type of cost, but accounting for it the best you can will pay off down the road.