Long-Term Care Planning – Why It’s Important and How to Start

You've worked diligently to build your retirement savings, envisioning years of comfort and pursuing your passions. But as you plan for your later years, there's a significant financial risk that often goes undiscussed: the potential costs of long-term care.

Long-term care isn't about medical treatment for an illness. Instead, it involves assistance with everyday personal tasks, like bathing, dressing, eating, or managing medication, due to a chronic illness, disability, or cognitive impairment. It's a reality for many, and the financial impact can be substantial if not planned for. Understanding this aspect of your future is a key component of a comprehensive retirement plan.

The Reality of Long-Term Care Needs

It's a common misconception that Medicare or standard health insurance will cover long-term care. They generally do not cover non-medical personal care or extended stays in nursing homes. While Medicaid can cover long-term care, it typically requires you to deplete most of your assets first.

Consider these statistics:

• High Likelihood: Approximately 70% of individuals turning age 65 today will need some form of long-term care services in their lifetime [1].

• Duration: While the average duration of care is around 3 years, about 20% of people will need care for longer than 5 years [2].

• Gender Differences: Women tend to need care for longer periods (average of 3.7 years) than men (average of 2.2 years) [2].

These figures highlight that needing long-term care isn't a rare occurrence; it's a significant possibility worth planning for.

The Cost of Care: Understanding the Financial Impact

The costs of long-term care services can be substantial and vary significantly by location and type of care. These expenses can quickly erode retirement savings if not addressed in your financial plan.

Based on recent data (as of 2024), here are some median annual costs nationally [3]:

• In-Home Care (Home Health Aide): $77,792

• Assisted Living Facility: $70,800

• Nursing Home (Semi-Private Room): $111,325

• Nursing Home (Private Room): $127,750

Imagine needing care for several years. These costs quickly escalate into hundreds of thousands of dollars, potentially impacting your ability to fund other retirement goals or leave a legacy for your loved ones.

How to Incorporate Long-Term Care into Your Retirement Plan

There are several ways to approach long-term care planning, and often, a combination of strategies works best.

1. Self-Funding (Using Your Savings and Investments): If you have a substantial amount of liquid assets, you might consider self-funding your long-term care needs. This involves setting aside a portion of your wealth specifically for potential care costs.

Considerations: This approach requires you to have a significant reserve that you are comfortable dedicating solely to potential care. It means absorbing all the risk yourself. If care costs exceed your set-aside funds, it could still impact your overall retirement plan.

2. Long-Term Care Insurance: This is an insurance policy designed specifically to cover long-term care services not covered by health insurance or Medicare. You pay premiums, and if you meet the policy's criteria for needing care (typically inability to perform two or more Activities of Daily Living, or ADLs), the policy pays a benefit up to pre-selected limits.

Types of Policies:

Traditional Long-Term Care (LTC) Insurance: A standalone policy. If you don't use it, you don't get the premiums back. Premiums can sometimes increase over time.

Hybrid (Asset-Based) Policies: These combine long-term care benefits with life insurance or an annuity. If you don't use the long-term care benefit, there's a death benefit for your heirs or a cash value/annuity payout. Premiums are often fixed.

Benefits of LTC Insurance:

Asset Protection: Helps shield your retirement savings and other assets from potentially catastrophic care costs.

More Care Options: Gives you more choices about where and how you receive care (e.g., in your home, assisted living, nursing home) rather than being limited by financial constraints.

Reduces Family Burden: Can lessen the financial and emotional strain on family members who might otherwise become primary caregivers.

Inflation Protection: Many policies offer options to increase benefits over time to keep pace with rising care costs.

Considerations: Premiums can be a significant cost. The older you are when you apply, and the poorer your health, the higher the premiums will likely be (or you may not qualify). Many advisors suggest considering coverage in your 50s or early 60s when premiums are typically more affordable and you're more likely to qualify.

3. Leveraging Home Equity: For some, the equity in their home could be a source of funds for long-term care, through options like a reverse mortgage or selling the home.

Considerations: This approach means drawing down a significant asset that may be part of your legacy or needed for your spouse's housing.

How to Get Started with Your Long-Term Care Plan

• Assess Your Potential Needs: Consider your family health history, current health status, and personal preferences for future care.

• Estimate Potential Costs: Research the costs of various types of long-term care in your preferred geographic area. Remember to factor in inflation.

• Evaluate Your Resources: Look at your existing savings, investments, and other income sources. How much could you realistically self-fund without jeopardizing other retirement goals?

• Explore Insurance Options: If insurance is a consideration, compare different types of policies, benefit periods, daily benefit amounts, elimination periods (the waiting period before benefits start), and most importantly, premium costs and the financial stability of the insurer.

• Integrate into Your Overall Retirement Plan: Long-term care planning isn't a standalone item; it's an integral part of your comprehensive retirement strategy. It needs to align with your overall income goals, tax plan, and legacy wishes.

Proactive Planning for Your Future

Ignoring the possibility of long-term care needs can leave a major gap in even the most carefully constructed retirement plans. By proactively assessing the risks, understanding the costs, and exploring the various ways to address potential needs, you can build a more resilient retirement strategy.

Let's discuss how long-term care planning fits into your unique financial picture, helping you ensure that your later years are filled with comfort and stability, rather than financial surprises.