How Likely Are You to Have an Extended Long-Term Care Need?
Long-term care can bring unexpected, significant costs for retirees, while many need some assistance, a smaller portion face extended care expenses. Thoughtful planning, including insurance, home equity, or Medicaid options, can help safeguard your financial security and dignity in later years.
“When you get older, you have a lot of idiosyncratic health risks. There might be a few retirees with spectacular health costs, and their spending dramatically increases.”
That was retirement researcher David Blanchett in my book How to Retire, discussing how an extended run of out-of-pocket healthcare costs, especially long-term care costs, affects a fairly small subset of the retiree population. Because those costs are so high, they inflate average spending for all older adults later in life, even though a fairly small percentage of the population incurs them.
How worried should older adults be about having an effective balloon payment at the end of their retirement spending period? And should they plan for that risk, however small?
Long-Term-Care Risk: The Baseline
Long-term care is nonmedical, or “custodial,” care to help people with their activities of daily living: self-care tasks like bathing, dressing, and eating. Because it’s not medical care, long-term care isn’t covered by Medicare or healthcare insurance policies, including most supplemental policies. People tend to need long-term care as they age, and those needs may be heavy if they experience cognitive decline.
Data on long-term-care usage suggests that the majority of people will need long-term care in their lifetimes. A research brief from the Department of Health and Human Services estimates that 56% of Americans turning 65 are likely to develop a condition requiring long-term care. Other studies have pegged the lifetime risk of needing long-term care as high as 70%.
However, data on long-term-care usage gets tricky because they typically capture all of the care being provided, both paid care and unpaid care delivered informally by family members and friends. Of course, providing care can take a huge toll on unpaid caregivers—physically, mentally, and on their careers. But if the aim is to gauge the financial impact of long-term care, the data on paid long-term-care usage are less scary. Forty-five percent of the population aged 65 and over are anticipated to need some type of paid care in their lifetimes, with an average duration of 0.8 years. (Women and single people are more likely to need long-term care than are married people and men.) Paying long-term care expenses over such a period might not be welcome, but it’s likely doable for many retirees.
Extreme Outlays
But how common is needing an even longer stretch of long-term care? Not very. Ten percent of people age 65-plus will need paid care that lasts between two and five years, and another 4.4% of people over age 65 will need paid care that lasts longer than five years.
The Center for Retirement Research is more ominous: It noted that about a fourth of people age 65 and older will have a care need that it classifies as “severe,” meaning that an individual needs care for three years or more and/or requires a high level of assistance with multiple activities of daily living. But here again, the CRR research included both paid and unpaid care.
What’s tricky from a planning perspective is that you can’t tell in advance whether you’ll be someone who needs care of that duration and magnitude—or any care at all. Further complicating matters is that long-term care usage, especially an extended need for long-term care, doesn’t necessarily correlate with ill health. In fact, it’s sometimes just the opposite. Healthy people live longer, and the longer we live, the more likely we are to experience cognitive decline. About 8% of people between 65 and 84 will develop Alzheimer’s disease, but nearly a third of people over age 85 will develop Alzheimer’s.
The connection between longevity and cognitive decline suggests that healthy people should consider building in a bigger buffer. Medical doctor and financial planner Carolyn McClanahan notes in How to Retire that she plans for two to three years’ worth of long-term care expenses for clients who are in average health. But if a client is very healthy, she plans for longer, about five years. “The average long-term care need is two to three years,” she notes. “And that average is brought down by unhealthy people.”
Planning Implications
For healthy people who worry they’re at risk of an extended long-term care need, it’s wise to factor that into their plans. Indeed, my Morningstar colleagues Spencer Look and Jack VanDerhei found that long-term care is a significant swing factor in the adequacy of an individual’s retirement assets. But as with most long-term-care questions, perfect answers are few and far between. Here are the main ones.
Insurance: On the surface, long-term-care insurance seems like the perfect way to mitigate the risk of extended long-term care outlays. But while some policies used to offer unlimited benefits, most policies available today cap benefits, either covering a specific number of years (often three or five) or setting a lifetime dollar limit on coverage. Policies with lifetime benefits still exist, but the trade-off may be a cap on the amount of benefits available annually.
Analysts who have looked at this issue have concluded that catastrophic policies that feature a long elimination period (the time when the patient must self-fund long-term care before the insurance company starts paying benefits) would be particularly attractive for people concerned about an extended long-term care need. They might be able to set aside a long-term-care bucket to cover the first two to three years’ worth of care, then the insurance would kick in after that. Unfortunately, insurance companies have been reluctant to create policies to provide care of an open-ended duration, and state insurance regulators have been hesitant to approve such policies.
Own Assets: At first blush, being able to cover a long-term care need of five years or more seems unmanageable for all but the wealthiest individuals. In Genworth/CareScout’s 2024 Cost of Care survey, the average nursing home (semiprivate room) expense clocked in at $111,000 in 2024, with higher or lower numbers depending on the type of care and geographic location. But Social Security would cover some of those costs, so that the long-term-care fund would “only” need to hold the overage. An important additional mitigating factor is that the investment portfolio may not be the household’s only asset. Many older adults also have home equity that they could plan to tap to pay for long-term care, either by selling the home outright or taking on a reverse mortgage. (I’ll be writing about this aspect of long-term care planning, including implications for a “well” spouse, in the future.)
That’s not to suggest that building such a large long-term-care fund is possible or advisable for most retirees, though. Even for retirees who have the assets, separating such a sizable share of the portfolio would lead to significantly lower spending during their healthy years—a questionable trade-off given that having high long-term care expenses is far from a sure thing.
Government-Provided Care: Finally, retirees concerned about incurring extreme long-term-care costs have a safety net in Medicaid, which is the largest payer of long-term care expenses in the US, covering approximately six in 10 people in nursing facilities in 2024. However, it’s far from an ideal solution in a few key respects. First and foremost, Medicaid has strict asset and income limits, which can have significant ramifications if one spouse remains well and is able to live independently while the other needs Medicaid-provided care. In addition, people who receive Medicaid-provided care won’t have the flexibility to choose where they receive care.