The Importance of Planning for Long-Term Care

A well-designed retirement plan must cover predictable spending and include provisions for unexpected contingencies that may arise during a long retirement. One of the most severe and unpredictable expenses retirees may face is long-term care (LTC). This encompasses a broad range of services addressing physical, mental, social, and medical needs that arise from significant physical or mental declines, which become more likely with advancing age.

The potential for such decline accelerates with age. Common statistics about how most people will need LTC, such as the oft-cited number at longtermcare.gov that at least 60% of people aged 65 and older will need some form of long-term care services during their lifetimes, generally include shorter-term events in their calculations as well.

LTC expenses are uncertain, ranging from $0 to potentially over $1 million. An expensive event could derail an otherwise well-built retirement plan. This problem is growing as people live longer since it is more likely that care will be needed. Older individuals suffer from higher rates of physical and cognitive problems, and they may have fewer family members or friends who are in a position to provide sustained daily assistance.

Because costs are high, and the probabilities are not particularly low, most long-term care funding strategies will add significant expenses to a retirement plan, either in the form of insurance premiums or as investments that are set aside as reserves. Planning for managing these potential expenses is an important part of a retirement income plan. However, it is often overlooked. Many are unwilling to confront the questions and possibilities related to losing their own independence. Psychologically, it can be difficult to face morbidity as no one likes thinking about the possibility they will no longer be able to effectively handle all of the basic activities of daily living. You might think this is something that only happens to other people, which is a natural response.

A common misperception is that Medicare pays for LTC. It doesn’t. Few people make proper plans for long-term care, which can create strains as it depletes household assets, bankrupts a surviving spouse, or adds burdens for other family members who might make large sacrifices to provide care. The default plan will be to self-fund any expenses until assets are depleted and then transition into Medicaid.

No retirement income plan is complete without properly considering funding for potential long-term care needs. A holistic retirement income plan should integrate strategies for funding potential long-term care needs. Addressing the risk of severe spending shocks due to LTC, whether through insurance, earmarked investments, or alternative financial tools, is essential for safeguarding the overall success and sustainability of one's retirement plan.