Planning for a Cost We’d Rather Not Need: Long-Term Care
Long-term care is one of those retirement expenses most of us would rather not need.
We talk about it regularly with clients, including households with $2 million or more saved for retirement. Having substantial savings doesn’t automatically answer the long-term care question. You still have to consider what care could look like, what it could cost, and how you’d want to pay for it.
It helps to start with an understanding of long-term care itself. From there, you can explore the different ways care may be provided, how those costs could fit into your retirement plan, and some of the strategies available to prepare for them.
What Does Long-Term Care Actually Mean?
Long-term care (LTC) is broader than the nursing home many people initially picture.
When you’re looking at long-term care insurance benefits, you’ll often hear about Activities of Daily Living, or ADLs. The six ADLs are:
- Bathing
- Dressing
- Eating
- Toileting
- Transferring, such as getting in or out of a bed or chair
- Continence
Many long-term care policies use the inability to perform at least two of these activities without assistance as part of determining eligibility for benefits. The specific requirements depend on the policy.
The care itself can take many forms.
You may want to stay in the home where you’ve lived for years and bring assistance to you. Someone else may choose a continuing care retirement community, or CCRC, where they can live independently and have access to additional levels of care if their needs change.
Where you receive care and how much care you need can significantly change the cost.
While Medicare may cover certain short-term or medically necessary skilled nursing and home health services when its requirements are met, it generally doesn’t pay for the ongoing custodial care people are usually referring to when they talk about long-term care.
Knowing that can help you identify which potential expenses need to be accounted for elsewhere in your retirement plan.
Modeling What Care Could Cost
Once you start thinking about where you’d prefer to receive care, you can begin modeling what those choices might mean financially.
Consider a continuing care retirement community (CCRC). Depending on the community, you may encounter a buy-in structure or something closer to a rental arrangement. Monthly costs may include expenses such as food, utilities, and other services you’re already paying for separately while living at home.
If you sell your home as part of the move, those proceeds may also become part of the calculation. They could go toward a buy-in or be added to savings that help support the ongoing cost.
Staying home creates a different calculation.
It’s easy to assume receiving care at home will automatically cost less. Once someone needs substantial in-home assistance, that may not be the case. The actual comparison depends on the amount and type of care needed, where you live, the facility you’re comparing it with, and other circumstances.
Running scenarios helps compare the costs rather than relying on assumptions about which setting will be more or less expensive. Once you have an idea of what you might be preparing for, the next question is where that money could come from.
Two Long-Term Care Strategies Worth Understanding
Two of the main strategies we discuss for preparing financially for long-term care are life insurance with long-term care benefits and long-term care annuities.
Life Insurance With Long-Term Care Benefits
I can make this one personal because I purchased a policy like this myself last year.
My particular policy has a $1 million death benefit. If I die without using the long-term care benefit, that death benefit is intended to provide money to my kids. If I do need qualifying long-term care, the policy gives me the ability to access part of that benefit to help pay for it.
Under the terms of my policy, I can access up to $200,000 per year for five years for qualifying long-term care expenses. Depending on how care unfolds, I could potentially access the benefit differently over a longer period. Any amount I use for long-term care reduces what would eventually remain as a death benefit.
Those numbers are specific to my policy. Other policies can have different premiums, benefits, requirements, and structures.
For me, that strategy achieved more than one purpose: if I need long-term care, I have a source of money designed to help pay for qualifying expenses. If I don’t use those benefits, there may still be a death benefit for my children.
Your priorities may be completely different from mine. Understanding how these policies work can generate some useful questions before deciding whether one belongs in your plan.
Long-Term Care Annuities
A long-term care annuity approaches the problem differently. Rather than focusing on a larger life insurance death benefit, you’re repositioning existing assets into a product designed to provide additional benefits if qualifying long-term care is needed.
The underwriting may also be lighter than what you typically picture when you hear the word “underwriting.” Depending on the product, it can sometimes involve something as simple as a roughly 30-minute video call, and many applicants may receive favorable ratings.
That rating can help determine the long-term care benefit available.
For example, some products provide a benefit equal to roughly two to three times the amount deposited. If someone repositioned $100,000 and qualified for that level of benefit, that could potentially create a pool of approximately $200,000 to $300,000 for qualifying long-term care expenses.
If long-term care is never needed, the remaining value is available to beneficiaries, depending on the product.
These strategies work differently, and understanding those differences can help you ask better questions about what may fit your goals.
Where the Money Comes From Matters Too
You may also decide that you have enough assets to pay for long-term care yourself.
If you’re self-funding LTC, it’s worth looking beyond the account balance and considering which assets you would actually use.
For example, selling investments from a taxable brokerage account may create capital gains depending on the investments being sold and their cost basis. Pulling money from other types of accounts can have different tax consequences.
Certain long-term care benefits, meanwhile, may receive favorable tax treatment when the requirements for qualifying long-term care expenses are met.
One source of money isn’t automatically better than another. But the source can affect the overall cost, so tax treatment is another piece worth including when you compare strategies.
That’s similar to the way we approach other retirement tax-planning decisions. We want to understand not only whether the money is available, but also what happens when we use it.
Finding Long-Term Care’s Place in Your Retirement Plan
Long-term care planning doesn’t sit apart from the rest of your retirement plan.
We’ve talked before about visualizing a retirement plan through the three buckets strategy: income, safety, and growth. Long-term care needs to be accounted for within the strategy already supporting your retirement.
You don’t need to know today exactly what care you’ll need years from now. The useful planning questions are what you’d prefer, what different possibilities could cost, where the money might come from, and how preparing for long-term care fits alongside everything else you want your retirement savings to support.