Planning for Long-Term Care

While most people approaching retirement might recognize that health care expenses may grow in their later years, long-term care—the prolonged need for assistance with activities of daily living—often escapes the conversation.

Yet according to the U.S. government's Administration for Community Living, a 65-year-old today has a roughly 70% chance of needing some type of long-term care in the future. That means odds are you or a loved one will eventually need help with basic functions such as brushing your teeth, getting dressed, eating meals, or bathing.

"People tend to see market risk as a threat to their retirement portfolios—but a big risk is actually the potential need for long-term care," says Susan Hirshman, director of wealth management at Schwab Wealth Advisory, Inc. "You don't know when, how much, and for how long you might need it. How much of that risk do you want to retain or reduce?"

Failure to account for the risks of long-term care costs—especially if certain conditions run in your family—can carry serious consequences, Susan says, including becoming a burden to family members or having insufficient funds for the care required. But there are ways to prepare.

Planning for long-term care is an understandably difficult subject to tackle, and many people don't know where to start. "To start, talk with your family," recommends Chris Kawashima, a senior research analyst at the Schwab Center for Financial Research: "The majority of long-term care is provided by family and friends, so be sure to include loved ones in your planning."

Asking three fundamental questions can help start the conversation:

Family caregiving can keep someone home much longer while reducing costs. But family caregivers can spend an average of 18 hours a week helping a loved one, paying a significant amount out of pocket each year—in addition to the emotional and physical demands of the task.

Most people prefer care at home, especially if their needs are relatively mild or manageable. But those preferences can change as needs increase with age. Retirement communities may be an alternative for those who want to live independently but with closer essential services.

Many people will need to pay for at least some long-term care out of pocket (aka self-insure), perhaps by tapping savings or income. But not knowing how long you may need to do that adds to the challenge. For context, according to a 2021 report by Genworth, the average annual cost for assisted living is $54,000; an in-home health aide is $61,776; and a private room in a nursing home is $108,405.

Long-term care tends to be "custodial," or non-medical, according to Susan. "This is a critical distinction because it is generally not covered by Medicare," she says. Indeed, roughly half of people surveyed by AARP in 2022 misunderstood that Medicare does not cover such costs as nursing home care or home health aides.

One solution around this is long-term care (LTC) insurance. The cost of a LTC policy varies according to the type, amount, and length of coverage, as well as your age and health conditions. Though the premiums for these policies generally can be high, paying for insurance premiums is generally more preferable to paying for long-term care out of pocket (or at least offset some costs).

The most cost-effective time to buy a policy is between the ages 55 and 65, Chris says. The average annual premium for a healthy 55-year-old in 2023 was $900 for men and $1,500 for women. But premiums for policies purchased at age 65 would be nearly double—and coverage may not even be available for people in their 70s. (Nearly half of all applicants in their 70s are rejected.)

"Generally speaking, payments shouldn't exceed 7% of your monthly expenses," Chris says. "Insurance tends to make the most sense when the likelihood of an event is relatively low but the risk of loss is great. The likelihood of needing some form of long-term care, however, is high."

There are two types of LTC policies in the marketplace: standalone and hybrid.

• Standalone, traditional policies are simpler and have lower premiums. Those premiums can increase over time and benefits are typically "use it or lose it." However, for a nominal amount, you can add an option to return the amount of premiums if the policy is never used. You can also purchase a joint policy with shared spousal benefits that can transfer unused benefits from one spouse to the other.
• Hybrid policies are newer, combining long-term care benefits with life insurance or an annuity. These policies are more complex but have grown increasingly popular, largely because the insured or their beneficiary receives some benefit even if there's no long-term care claim. Additionally, many hybrid policies limit the period for paying premiums, protecting you from increasingly costly premiums in the future.

As with many estate and retirement matters, a holistic approach generally enhances the process of planning for long-term care. For some, the financial aspect can become a focal point, but keep in mind the human side of it. Your care needs will likely affect others around you, so make sure that everyone is on the same page—and review your plans regularly or as your situation changes.

"The most effective plans result from good communication with the people whose care you most likely will rely on," Susan says. "You could have the greatest LTC policy in place, but if you don't communicate your wishes to your loved ones, you may not receive the care you intended to have."