The Growing Concern of Long-Term Care Costs in Retirement
Planning for retirement is becoming increasingly complex, with one of the most significant challenges being how to cover long-term care expenses. Research from the Boston College Center for Retirement Research reveals that approximately 80% of retirees will require some form of long-term care, while about 25% will need “high-intensity” care lasting more than two years.
The financial burden of long-term care is substantial. In 2023, the median annual costs in the US were staggering: $116,800 for a private room in a nursing home, $75,500 for home health aides, and $64,200 for an assisted-living facility. Despite these potentially catastrophic expenses, many retirees rank long-term care costs low on their list of retirement concerns.
A 2024 survey highlighted this disconnect, showing that while 47% of respondents were “worried” or “very worried” about general cost-of-living expenses in retirement, and another 47% were concerned about political instability, only 33% were worried about long-term care affordability. The concern about covering medical expenses was even lower at 24%.
How Retirees Currently Cover Long-Term Care Costs
While informal care provided by family members is common, paid care is often eventually covered by Medicare. However, the data shows that only about 4% of long-term care in the US is covered by insurance, leaving a significant gap in coverage.
The reality is stark: many people need long-term care, few are insured for these events, and most underestimate the risks. So, how do people end up covering these costs when they’re not prepared?
Planning for Long-Term Care Expenses: Three Main Options
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Long-Term Care Insurance: This can be a viable option for those in their 50s or early 60s who are still in good health. However, for those closer to retirement, it may be unavailable or too expensive.
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Paying Out of Pocket: This involves spending down bank accounts, investments, and home equity to cover long-term care costs. This approach can significantly deplete a retiree’s assets.
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Medicaid: This is the most common way to pay for long-term care, covering an estimated 51% of long-term care patients. However, Medicaid eligibility requires a household to be impoverished, meaning individuals must spend down their assets before qualifying.
The Financial Impact of Long-Term Care Costs
Research from the Center for Retirement Research shows that households hit by a long-term care shock experience an average decline in net worth of $68,000 in the year of the shock. Much of this deterioration comes from dipping into home equity, either through home equity loans or selling the home. Interestingly, there’s little evidence that people move in with their children or have their children move closer when faced with long-term care needs.
The pattern is consistent: people spend down their assets, often using home equity, reducing their eventual bequests. Once assets are depleted, most rely on Medicaid’s safety net.
Preparing for the Reality of Long-Term Care Costs
While there’s no easy solution, financial planners encourage individuals to honestly assess the risk of long-term care costs and consider their options. Questions to consider include: Can you afford long-term care insurance? Will you need to spend down your financial assets? Might you need to tap into your home equity?
It’s not a pleasant thought experiment, but being prepared for the reality is crucial. The data tells a different story from what many people expect: few will avoid needing long-term care. Understanding the risks and planning accordingly is essential for a more secure retirement.
