Are You Severely Underestimating This Huge Retirement Cost?

Source: Thinkstock

Source: Thinkstock

One of the most overlooked retirement costs may also be the most expensive. Many people look forward to living mortgage-free in retirement, but they fail to anticipate the high prices of assisted living or skilled nursing facilities.

Read more: Take It Easy: What You Should Know About Semi-Retirement

The majority of Americans underestimate the costs of nursing home care and are neglecting the need to save for it. Nearly 57 percent of Americans believe a year in a nursing home will cost them less than $75,000, according to a recent survey by However, a study by MetLife finds that semi-private rooms in nursing homes cost an average of $81,030 per year, while private rooms go for $90,520. Both men and women are about equally naive about nursing home costs.

Read more: The Side You Never Think About: 5 Ways Retirement Can Go Bad

Making matters worse, people in some regions may be underestimating costs by an even wider margin – perhaps by tens of thousands of dollars. For example, the average cost of a semi-private room in the New York City area is $141,620, which is 75 percent higher than the national average. In contrast, Louisiana, Alabama, Oklahoma, and Missouri offer some of the cheapest long-term care services in the country.

Read more: 8 U.S. Cities With the Most Retirees

Several factors should be considered when planning for long-term care coverage. “As we try to identify coverage the costs can be all over the map. People need to understand the geography of where they need care because the costs can vary significantly,” explains Stein Olavsrud, CFP, portfolio manager at FBB Capital Partners, in a phone interview. “Also, many people don’t realize the costs of nursing care and assisted living are vastly different. Nursing care is essentially double the cost of assisted living.”

Stein urges those looking for long-term care insurance to consider the bigger picture. Ideally, you’re selecting an insurance provider when you’re 55 or 60 years old, but you may not need to use the coverage until you’re 85 or older. “The most important factor to look at is the actual credit rating of the company providing coverage,” says Stein. “If you obtain coverage for a company that is marginal, it’s very likely that they might not be in existence to provide benefits in thirty years.” Furthermore, if you have a sizable pension plan or large retirement savings, you may not even need long-term care coverage.

Once you find a company with a favorable credit rating, look at the expected daily benefit to make sure it’s adequate for your financial needs, and remember to account for inflation. Some plans offer a cost of living rider, which increases the daily benefit amount as the consumer price index increases. However, Stein notes that while the government’s inflation gauge typically averages around 3 percent per year, nursing home costs rise about 4.5 percent to 6.5 percent each year.

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