Why long-term care planning matters for retirement
Long-term care (LTC) is one of the biggest non-market risks retirees face: an extended need for help with everyday activities can deplete savings, accelerate the sale of assets, or force reliance on government programs that have eligibility limits. In my work advising retirees for more than 15 years, I’ve seen portfolios built for a 30-year retirement evaporate in a few years when LTC events occur without planning.
The goal of LTC planning is simple: reduce the odds that health-related care needs will derail retirement goals or burden family members. That requires realistic cost projections, a plan to fund care, and coordination with broader retirement income, tax, and estate strategies.
How long-term care costs typically break down
National cost surveys (Genworth and others) show common annual price ranges that are useful planning benchmarks:
- In‑home care (home health aide): roughly $40,000–$60,000 per year (varies by hours of care and region). (Genworth Cost of Care Survey)
- Assisted living: often around $50,000–$70,000 per year depending on location and level of services. (Genworth)
- Nursing home (skilled nursing): commonly exceeds $100,000 per year for full-time care in many areas. (Genworth)
These figures change with inflation and local labor markets. Include a 3–4%+ annual inflation assumption for medical and care costs when projecting decades ahead; actual health care inflation has outpaced general inflation historically, so many advisors use higher rates for LTC projections.
Sources: Genworth Cost of Care Survey; U.S. Administration for Community Living (ACL) data (acl.gov).
Key funding options and how to evaluate them
- Self-funding (savings and retirement accounts)
- Pros: full flexibility, avoids premiums and underwriting.
- Cons: large risk of spending down assets; may affect legacy goals and Medicaid eligibility.
- Practical use: earmark part of portfolio as a “care reserve” or use laddered liquid accounts and an HSA for tax-advantaged medical spending.
- Traditional long-term care insurance (standalone LTC policies)
- Pros: transfers risk, predictable monthly benefit if you qualify.
- Cons: high premiums (especially if bought late), medical underwriting, and ongoing premium increase risk depends on insurer.
- Timing tip: many advisors recommend purchasing in the mid-50s to early 60s when health underwriting is more favorable and premiums are lower.
- Hybrid policies (life insurance or annuity with LTC rider)
- Pros: returns a death benefit if LTC isn’t needed; often easier underwriting; can be a core component of catastrophic planning.
- Cons: higher up-front cost; complexity in fees and benefit triggers.
- Medicaid and public programs
- Pros: Medicaid can cover nursing home and certain home-based services for eligible individuals.
- Cons: strict income and asset rules, look-back periods, and potential need to spend down assets to qualify. Medicaid rules vary by state—careful planning with an elder-law attorney is essential. See Medicaid guidance (medicaid.gov).
- Informal care and community supports
- Many families combine paid care with unpaid family caregiving. Home- and community-based services (HCBS) can be lower-cost alternatives and are an important part of many plans (ACL; Medicare.gov explains Medicare limits).
For a practical breakdown of funding trade-offs and DIY strategies, see our guide on Long-Term Care Planning Basics (FinHelp) and this primer on Preparing for Health Costs in Retirement: Medicare, Gaps, and Long-Term Care (FinHelp).
- Long-Term Care Planning Basics: https://finhelp.io/glossary/long-term-care-planning-basics/
- Preparing for Health Costs in Retirement: Medicare, Gaps, and Long-Term Care: https://finhelp.io/glossary/preparing-for-health-costs-in-retirement-medicare-gaps-and-long-term-care/
How to build a retirement-friendly LTC plan (step-by-step)
- Inventory health, family, and financial factors
- Current health status and family history of chronic illness or dementia.
- Available family caregivers, their capacity, and geographic proximity.
- Liquid net worth, retirement income streams (Social Security, pensions), and long-term care assets.
- Estimate realistic need and cost horizon
- Use conservative estimates for hours of care, likely duration (plans often model 3–5 years and a catastrophic 7–10+ years), and local care costs.
- Define goals
- Preserve estate vs. preserve income vs. maximize flexibility. Your funding choices should align with these goals.
- Compare funding strategies
- Model costs under several scenarios: self-fund, buy LTC insurance at different benefit levels, hybrid purchase, and Medicaid conversion after spend-down.
- Implement a combination approach
- Common structure: maintain a liquid care reserve for near-term needs, buy a modest LTC or hybrid policy for catastrophic risk, and document Medicaid/asset-protection steps if appropriate.
- Review and update regularly
- Re-evaluate every 2–3 years or after major life events (health changes, market shifts, death of a spouse).
Tax and legal considerations
- HSAs: Funds in a Health Savings Account (HSA) can be used tax-free for qualified medical expenses and, after age 65, for any purpose (non-qualified withdrawals taxed). Some LTC-related qualified expenses may be allowed—check IRS guidance and FinHelp’s HSA guide. (irs.gov)
- Medicaid planning: The federal Medicaid program requires state-level rules; many people use irrevocable trusts or carefully timed transfers to meet eligibility rules, but these moves must be made years ahead due to look-back rules. Consult an elder-law attorney (medicaid.gov).
- Long-term care premium tax treatment: Some LTC premiums may be deductible as medical expenses subject to AGI thresholds for itemizers. Check current IRS rules for limits and deductibility (irs.gov).
Common mistakes and how to avoid them
- Mistake: Assuming Medicare covers long-term custodial care. Medicare generally covers skilled, short-term post-hospital rehab—not ongoing custodial care (medicare.gov).
- Mistake: Procrastination. Waiting until health problems appear can make insurance unaffordable or unavailable.
- Mistake: Relying on a single solution. A blended plan (reserve + insurance + family support + legal planning) is usually more resilient.
Practical checklist for readers
- Start a dedicated LTC cost projection using local care rates.
- Decide whether you want to preserve an inheritance, protect a spouse, or minimize premiums—this drives product choice.
- If leaning toward insurance, get quotes and apply before health declines.
- Open and fund an HSA if eligible; treat a portion as LTC savings.
- Meet with an elder-law attorney if Medicaid protection is likely.
Real-world perspective from practice
I’ve helped clients who bought modest hybrid policies in their late 50s that cleared an entire planning problem: the policy covered severe care needs while preserving a death benefit for heirs. I’ve also seen families without any plan exhausted by nursing home costs within a decade. The most reliable outcome is a documented, multi-pronged plan made before crisis.
FAQs (brief answers)
-
Will Medicare pay for long-term care?
No—Medicare covers limited skilled services and short-term rehab after hospitalization; it does not generally pay for long-term custodial care. (medicare.gov) -
Is long-term care insurance worth it?
It depends on age, health, family risk, and financial goals. For many, hybrid products or limited-benefit policies make sense to cover catastrophic risk while preserving flexibility. -
Can my retirement accounts be used for long-term care?
Yes, retirement distributions can fund care but may have tax consequences; coordinate with tax planning to avoid unnecessary taxable events.
Sources and further reading
- Genworth Cost of Care Survey (annual): https://www.genworth.com/aging-and-you/finances/cost-of-care.html
- Medicare — What Medicare Does and Does Not Cover: https://www.medicare.gov/coverage/long-term-care
- Medicaid — Long-Term Services & Supports: https://www.medicaid.gov/medicaid/long-term-services-supports/index.html
- Administration for Community Living (ACL) — Long-Term Services & Supports: https://acl.gov
- National Association of Insurance Commissioners — Long-Term Care: https://www.naic.org
Professional disclaimer: This article is for educational purposes only and does not constitute individualized financial, tax, or legal advice. For decisions that affect your retirement or eligibility for public benefits, consult a licensed financial planner and an elder-law attorney.
Further FinHelp resources:
- When to Buy Long-Term Care Insurance: A Decision Checklist: https://finhelp.io/glossary/when-to-buy-long-term-care-insurance-a-decision-checklist/
- Long-Term Care Planning Basics: https://finhelp.io/glossary/long-term-care-planning-basics/
