The Financial Reality of Long-Term Care
Retirement planning is challenging. One of the biggest challenges is figuring out how to pay for long-term care costs.
According to research from the Center for Retirement Research at Boston College, about 80 percent of retirees will require some long-term care, while roughly one-quarter of retirees will require “high-intensity” care that lasts for more than two years.[1]
It will come as no surprise that paid long-term care is insanely expensive. In 2023, the median annual costs were $116,800 for a private room in a nursing home, $75,500 for home health aides, and $64,200 for an assisted-living facility in the U.S.
Despite this potential financial catastrophe, most people put medical and long-term care costs relatively low on their list of retirement concerns. A 2024 survey found that 47 percent of respondents were “worried” or “very worried” about high and rising general cost of living expenses in retirement. Another 47 percent were worried about political instability.
But only 33 percent were worried about long-term care affordability. And only 24 percent were worried about covering medical expenses.
Informal care is common, with family members stepping in to help in many circumstances. But most paid care is eventually covered by Medicare. The data show that only about 4 percent of long-term care in the U.S. is covered by insurance.
The stark reality is that many people need long-term care, few are insured for these events, and most underestimate the risks. What do the data show about how people end up covering these costs, given their unpreparedness? How do people cover long-term care needs when they arise?
There are three main ways to plan for long-term care expenses:
Buy long-term care insurance. Depending on your age and how close you are to retirement, the insurance may be unavailable or too expensive. But if you are still in your 50s or very early 60s and still in good health, a policy may be worthwhile.
Pay out of pocket. This means you spend down your bank accounts, investments, and home equity to cover costs.
(Most common) rely on Medicaid. Medicaid covers long-term care needs for an estimated 51 percent of long-term care patients.
The problem is that Medicaid eligibility requires a household to be impoverished. You must be totally broke before Medicaid steps in to cover costs.
If you are like most people and don’t have long-term care insurance, long-term care costs may drain your resources before you are eventually caught by Medicaid’s safety net.
According to the Center for Retirement Research, the net worth of households hit by a long-term care shock “declines in the year of shock by $68,000, on average.” It would be nice if we all had money in the bank to cover the hit to net worth. What the data show is that much of this deterioration in net worth comes from home equity.
Image created with ChatGPT by Tableaux Wealth
In other words, when a long-term care financial shock hits, many households are forced to dip into their home equity. They may need to take a home equity loan, or possibly even sell their home. Previous research has shown that households “rarely tap home equity – except when moving into a nursing home or near death.”
Interestingly, there is little evidence that people suffering a long-term care shock move in with their children, or have their children move closer. This finding contradicts what many survey respondents think would happen if they were to suffer a long-term care event.
Together, these findings show that the pattern of paying for long-term care is consistent. People generally spend down their assets, typically using home equity and thereby reducing their eventual bequests. Once assets are gone, most people are forced to rely on the safety net of Medicaid.
There is no easy answer to this difficult situation. Health care costs continue to rise, with people living longer and requiring more.
From a financial planning perspective, I encourage people to honestly assess the risk of long-term care costs and consider options for dealing with those costs. Can you afford long-term care insurance? Will you be forced to spend down your bank accounts and financial assets? Might you need to tap into your home equity?
It's not the most enjoyable thought experiment when planning for retirement, but I think it’s useful to be prepared for reality. When asked “what is your plan for long-term care,” many people answer, “I’m not going to need it.” It would be wonderful if we had that option. Few people think they’re really going to need long-term care, but the data tells an entirely different story.
[1] Much of the data provided in this article comes from “How Do Retirees Cope with Uninsured Medical and Long-Term Care Costs?
”, a working paper from the Center for Retirement Research at Boston College.