Why estimating long-term care (LTC) costs matters for retirement

Long-term care can be one of the largest unplanned expenses in retirement because Medicare generally does not cover custodial care and private health plans have limits (Medicare.gov; AARP). In my 15+ years advising clients, I’ve seen healthy couples underestimate this risk, then shift retirement spending and housing plans late in life when care needs appear. Building a realistic LTC cost estimate early improves choices about insurance, savings, and when to claim Social Security.

Key variables to include in an LTC cost estimate

A useful LTC estimate combines several inputs. Treat it as a scenario analysis rather than a single-point forecast.

  • Current local costs: Use regional data for home care, assisted living, and nursing homes. National medians are a starting point but local costs can vary ±30% or more (Genworth Cost of Care Survey).
  • Type of care: Home health aide, adult day care, assisted living, memory care, or nursing home — each has a different daily/annual price and staffing model.
  • Likelihood of needing care: AARP and other studies estimate roughly 50–70% of people over age 65 will need some form of LTC. Use a probability weight when creating expected-value estimates.
  • Duration: Short, median, and long scenarios (e.g., 1 year, 3 years, 5+ years). Median length of need differs by type and underlying condition.
  • Inflation for care costs: Healthcare and LTC inflation historically exceed general inflation. Use an LTC-specific inflation rate (3–5% is common for planning; adjust higher in high-cost regions).
  • Discount rate or expected investment return: When converting future costs to present dollars, choose a conservative real return (after inflation) to avoid overstating funding capacity.
  • Personal factors: Family history, current health, BMI, smoking status, and caregiver availability affect probability and preferred setting.

Step-by-step method to create your estimate

Follow these practical steps. I use this same approach with clients to build realistic plans.

1) Gather current local prices

  • Find today’s median weekly or annual costs for: home health care, assisted living, and a private-room nursing home. Sources: Genworth Cost of Care, local provider listings, and state health department websites. Example links: Genworth Cost of Care, AARP long-term care resources.

2) Select scenarios for care type and duration

  • Define three cases: conservative (1 year), base (3 years), and severe (5+ years). Decide which care type is most likely in each case.

3) Apply LTC inflation to project nominal future cost

  • Formula: Future cost = Current cost × (1 + i)^n
  • Example: Current nursing-home cost $110,000 × (1.04)^20 ≈ $239,000 in 20 years (4% LTC inflation).

4) Weight by probability to get expected cost

  • If probability of needing any LTC is 60%, and within that 40% will need nursing-home-level care, the expected-cost contribution from nursing home = probability × projected cost × expected duration.

5) Convert to present dollars (if comparing to savings today)

  • Present value = Future cost ÷ (1 + r)^n, where r is your assumed discount rate (e.g., expected portfolio real return).

6) Compare to current savings and income

  • Subtract projected sources (Medicaid for low-income, veteran benefits, LTC insurance benefits) from the estimated cost to find the funding gap.

7) Decide funding strategy

  • Options: buy LTC insurance or hybrid life/LTC product, self-insure (savings/annuities), plan for family caregiving, or Medicaid planning. Each has trade-offs in cost, liquidity, and eligibility.

Sample calculation (practical numbers)

Assume a 60-year-old wants to estimate nursing-home costs at age 85 (25 years):

  • Current private-room cost: $110,000/year
  • LTC inflation: 4% annually
  • Projected cost in 25 years = $110,000 × (1.04)^25 ≈ $292,000/year
  • If median duration = 3 years, nominal total = $292,000 × 3 ≈ $876,000
  • If probability of needing nursing-home care = 40%, expected cost = 0.4 × $876,000 ≈ $350,400 (nominal)
  • Present value (discount rate 3%): PV ≈ $350,400 ÷ (1.03)^25 ≈ $208,000
    This shows how probability, duration, inflation, and discounting change the funding target.

Tools and data sources to use

  • Genworth Cost of Care Survey and online Cost of Care calculator for local breakdowns (home care, assisted living, nursing homes).
  • AARP and CMS guidance for prevalence and policy context (AARP.org; Medicare.gov).
  • State home- and community-based services (HCBS) enrollments and waiting lists for Medicaid options.
  • Provider pricing calls and local care agencies — prices can differ materially from published medians. In practice, I recommend calling 3–5 local providers to validate published data.

Funding options and when they make sense

  • Self-funding: Use taxable savings, retirement accounts, and annuities. Works best for people with high liquid assets and predictable income.
  • Traditional LTC insurance: Transfers risk but can be expensive and premiums rise. Best purchased in 50s to early 60s when healthy to lock rates.
  • Hybrid products (life insurance + LTC riders): Provide some legacy value if LTC isn’t used and can be easier to qualify for in some cases.
  • Medicaid planning: For low-asset households, Medicaid is the safety net but requires meeting income/asset limits and often involves planning (and timing) strategies.
  • Family caregiving: Reduces paid care costs but has emotional and economic trade-offs for the caregiver (lost wages, stress).

For deeper comparisons, see our guide on Long-Term Care Insurance vs. Self-Insuring: Pros and Cons and strategies for Integrating Long-Term Care with Retirement Income Planning.

Common mistakes to avoid

  • Using national averages only: Local costs drive outcomes. Always validate with local provider pricing.
  • Forgetting inflation: LTC inflation often outpaces CPI; a 2% assumption underestimates needs.
  • Over-relying on Medicare: Medicare covers short-term skilled care after hospitalizations, not prolonged custodial care (Medicare.gov).
  • Ignoring family health history: Genetics and lifestyle materially change probability and timing of need.

Tax and legal considerations

Some long-term care insurance premiums are treated as medical expenses or as qualified long-term care contracts for tax purposes; rules change and limits are age-based under IRS guidance. Consult IRS Publication 502 and a tax advisor for current rules before assuming a deduction. Medicaid eligibility and asset-protection strategies require careful legal planning and vary by state.

How to turn an estimate into action (checklist)

  • Step 1: Collect local costs for the three care types you’d accept (home care, assisted living, nursing home).
  • Step 2: Build three scenarios (1, 3, 5+ years) and set LTC inflation assumptions.
  • Step 3: Calculate nominal and present values using the formulas above.
  • Step 4: Identify existing coverage (Medicare, VA benefits, any LTC policy) and subtract expected benefits.
  • Step 5: Choose a funding mix—savings, insurance, hybrid, or family support—and model its effect on retirement cash flow.
  • Step 6: Revisit estimates every 3–5 years or after major health changes.

Final recommendations

Estimating LTC costs is about managing uncertainty with scenarios and probabilities, not predicting a single number. Start early, validate local costs, and compare funding strategies against your retirement income needs and legacy goals. In my practice, clients who build a conservative LTC funding plan before age 65 avoid disruptive late-life trade-offs and retain more control over care choices.

DISCLAIMER: This article is educational and not personalized financial, legal, or tax advice. Speak with a licensed financial planner, elder-law attorney, or tax professional about your specific situation.

AUTHORITATIVE SOURCES

  • Genworth Cost of Care Survey (annual)
  • AARP: Long-Term Services and Supports resources
  • Medicare.gov: What Medicare Covers
  • IRS Publication 502: Medical and Dental Expenses