How Should I Fund Long-Term Care?

Funding long-term care is the biggest financial risk faced by US retirees. Therefore, planning for long-term care is a critical (and often-ignored component) of comprehensive retirement planning. Typical costs currently range from $50-100K per year and can drain retirement savings in old age. There is a current New York Times series on the long-term care crisis in the US (available here) discussing rising costs, lack of public options, and the inadequacies of LTC insurance.

There are four options for funding LTC: 1. Self funding, 2. LTC insurance, 3. Medicaid, 4. Family. I discuss the first three of these options below.

1. Self-funding:

Roughly speaking, a household needs around $500K-$1M in savings per retiree (funding $100K per year for 5-10 years) earmarked for LTC to ensure that their future care is FULLY funded in the financial worst case scenario.

ShoreUp Retirement Solutions is currently developing a calculator which will provide personalized projections (based on geography, demographics, & health attributes) for how much money or insurance a particular household needs to fund LTC. Some households will need far less than the cited max of $1M.

1. Long-term care insurance

LTC insurance can fill gaps where a household does not have $1M in extra dollars or is unwilling to rely on children & other family for this care. Two notes:

• The ideal time to buy LTC insurance is in one’s 50s- 60s. Premia are more affordable over a lifetime at earlier ages in retirement. In addition, people in older age ranges are denied coverage at higher rates - typically because of health conditions.

• It’s critical to find the right insurance company and policy. The insurer should be well-reputed in the LTC market with a history of stable premia over time. In addition, the policy should have certain features like inflation protection, reimbursement payments, and comprehensive coverage (i.e., cover both home and facility-based care). To make LTC insurance premia cheaper, a household should generally choose as large of a deductible (i.e., the policy’s “elimination period” = number of initial days of LTC for which insurance is not paid) as they can afford.

1. Medicaid

MEDICAID (gov’t medical insurance for needy households) is currently the only public program which funds LTC. MEDICARE (gov’t medical insurance program for seniors) - does NOT fund LTC, only short-term care during medical recovery or treatment.

Medicaid can only be accessed once assets and income become sufficiently low - serving as a backstop in case a household runs out of money. However, Medicaid recipients can have problems accessing benefits, home care and facilities (because of its low payments).

Keep an eye out for our personalized long-term care funding calculator and more blog posts on this topic including long-term care insurance options.