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Don't Let Failing Health Crack Your Nest Egg
Denise Appleby 07.26.07, 11:15 AM ET

If you eat right and exercise (most of the time) and inherit healthy genes, you may enjoy a long and healthy retirement with no health care expenses other than those incurred for annual check-ups and general preventive care. On the other hand, if you are prone to illness, your medical expenses could take a big bite out of your retirement savings and adversely affect the financial security of your retirement. Even if you inherit healthy genes and live a healthy lifestyle, you may not want to roll the dice on what your health status will be during your retirement, as the cost of long-term care could wipe out your savings--you should be prepared for the worst.

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The U.S. Department of Health and Human Services defines long-term care as "a variety of services that include medical and non-medical care to people who have a chronic illness or disability. Long-term care helps meet health or personal needs. Most long-term care is to assist people with support services such as activities of daily living like dressing, bathing and using the bathroom." It goes on to explain that "long-term care can be provided at home, in the community, in assisted living or in nursing homes." (For related reading, see "A New Approach To Long-Term Care Insurance" and "Taking The Surprise Out Of Long-Term Care".)

Don't think you'll need long-term care? Statistics from the Department of Health and Human Services suggest otherwise. They state that by 2020, 12 million older Americans will need long-term care. Those who reach age 65 have a 40% chance of entering a nursing home, and about 10% of the people who enter a nursing home will stay there for at least five years.

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Life expectancies have increased; if your ancestors lived long and healthy lives, it could mean that you are likely to live even longer. This increases the likelihood that you will need long-term care, as the need for it increases the longer you live past age 65.

According to the Centers for Disease Control and Prevention, the national average cost for a nursing home was about $6,266 per month in 2006. This could be more or less, depending on the state in which you live. With the average length of stay for current residents in nursing homes being 892 days, and 272 days for discharged residents, the total costs can add up to a significant amount. Further, many patients require post-acute institutional skilled or custodial care, which, according to a 2006 AARP report, costs an average of $75,192 annually for a private room in 2006. That's more than $375,000 over a five-year period. Unfortunately, it doesn't stop there.

According to the AARP "Fact Sheet on Assisted Living in the United States," the national median cost for assisted living is approximately $2,968 per month, a cost which is not covered by Medicare. (For related reading, see "Medicare: Defining The Lines".)

You may think Medicare and Medicaid will pay for your long-term care, but you must meet eligibility requirements for Medicaid. In order to qualify, you must have virtually no assets. Furthermore, there is a cap on the amount covered, and Medicare does not cover all expenses for medical care and long-term care.

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Medicare provides hospital insurance for in-patient care and certain follow-up care. It also pays for medical insurance coverage for physician services that are not covered under the hospital insurance. The medical portion of the insurance is available at a premium and is optional. Even if you are covered under Medicare, it will not cover all of your expenses.

According to "Medicare and You: 2007," published by the CDC, the following are the amounts you would be required to pay for 2007 when covered under Medicare. (These services must be covered by Medicare Advantage Plans. Costs vary by plan.)

-- Blood: You pay all costs for the first three pints of blood you get as an inpatient, then 20% of the Medicare-approved amount for additional pints of blood (unless donated to replace what's used).

-- Home health care: You pay 0% for home health care services and 20% of the Medicare-approved amount for durable medical equipment.

-- Hospice care: You pay a copayment of up to $5 for outpatient prescription drugs and 5% of the Medicare-approved amount for inpatient respite care (short-term care given by another caregiver, so the usual caregiver can rest).

-- Hospital stay: For each benefit period, you pay $992 for days 1 through 60, $248 per day for days 61 through 90, $496 per day for days 91 through 150, and all costs for each day over 150 days.

-- Skilled nursing facility stay: You pay $0 for the first 20 days, $124 per day for days 21 through 100 each benefit period, and all costs for each day after day 100 in the benefit period.

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Medicaid is a joint federal and state program that helps pay for medical costs incurred by individuals with limited income and resources. The eligibility and premium requirements are determined under state law and generally require that you have no assets and fall within a low-income category. For individual state requirements, visit the Center for Medicare and Medicaid Services of the U.S. Department of Health and Human Services.

Amounts saved in retirement nest eggs are usually intended to finance an individual's retirement years, or to be left as an inheritance for loved ones. Not having the proper resources to cover long-term care costs can result in a nest egg being used to pay for medical expenses, post-acute institutional care such as that which is provided at a skilled nursing facility, home-health care and other health-related expenses not covered under insurance.

However, there are steps that can be taken to prevent this scenario:

--Check your state law to determine the Medicaid coverage requirements.

--Check your state law to determine whether your retirement account is protected or if you would be required to liquidate your retirement account and hand it over to the state under its Medicaid eligibility requirements.

--Visit the Social Security Administration's Web site to review the Medicare rules and determine the best time for you to sign up.

--Consider purchasing long-term care insurance if it is determined that it would be a good product for you. But before you do, check to ensure that the provider is reputable and reliable. A recent article in a reputable newspaper exposed a long-term insurance care provider that failed to live up to its promise to cover expenses which according to the policy, were covered.

--If you are eligible, make contributions to a health savings account. One of the attractive features of an HSA is that the balance need not be used for medical expenses each year, but can be left to accumulate and add to your retirement nest egg.

--Talk to an elder law attorney in your area regarding the above, and about all things related to health coverage during your retirement years. These attorneys usually specialize in the area of elder care, including providing guidance on eligibility, insurance requirements and determining the steps you can take to protect your assets. If you cannot afford an attorney, visit LawHelp.org to determine whether you are eligible for free legal aid.

These steps should be taken before the need for care arises. Work with your attorney to design your action plan and to establish a time line for putting it in effect.

Poor health could result in a poor retirement, financially speaking, because a lack of financial resources could adversely affect you in many ways. You can avoid this scenario by taking the right steps before it is too late. Failure to implement a plan that is suitable for your financial profile could result in your receiving medical and post-acute institutional care that is of a lesser quality than you really need or would find acceptable. It may even mean that you are not able to receive some of these services due to lack of financial resources. Make sure you enjoy your retirement by planning early and sticking to your time line. While being ill is not a goal on any of our lists, having the resources to treat medical problems if they arise should be.

Denise Appleby is a retirement planning consultant and a freelance writer and editor. She also owns her own business, Appleby Retirement Consulting .

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