The Hidden Risk in Most Retirement Plans: Long-Term Care

Long-term care is one of the most significant financial risks in retirement — and one of the most commonly overlooked. According to the U.S. Department of Health and Human Services, nearly 70% of Americans who reach age 65 will need some form of long-term care during their lifetime. The average duration of care is three years, but 20% of people will need care for more than five years.

The costs are substantial. In 2024, the national median cost of a private room in a nursing home is approximately $105,000 per year. Assisted living averages around $54,000 per year. Home health aide services — often the preferred option — cost approximately $30 per hour, which can add up to $60,000 or more per year for full-time care.

Medicare does not cover long-term custodial care — the assistance with daily activities (bathing, dressing, eating, mobility) that most people associate with long-term care. Medicare covers only short-term skilled nursing care following a qualifying hospital stay, and only for a limited period. Medicaid does cover long-term care, but only after you have spent down most of your assets to qualify — a process that can be devastating to a surviving spouse.

There are three primary strategies for funding long-term care: self-funding, traditional long-term care insurance, and hybrid products.

Self-funding means setting aside a dedicated pool of assets to cover potential long-term care costs. This approach works well for high-net-worth individuals who can absorb the cost without jeopardizing their retirement income. The risk is that care needs exceed the reserve, or that the assets are needed for other purposes.

Traditional long-term care insurance provides a daily or monthly benefit for qualifying care expenses. Premiums are based on your age and health at the time of purchase — the younger and healthier you are, the lower your premiums. The challenge with traditional LTC insurance is that premiums can increase over time, and many insurers have exited the market, creating uncertainty about long-term availability.

Hybrid products — life insurance or annuities with long-term care riders — have become increasingly popular. These products provide a death benefit if you don't need care, and an accelerated benefit for long-term care if you do. They offer more certainty than traditional LTC insurance (premiums are typically fixed) and eliminate the 'use it or lose it' concern.

The best time to plan for long-term care is in your 50s or early 60s, when you are still healthy enough to qualify for coverage at reasonable rates. Waiting until you need care is too late — by then, coverage may be unavailable or unaffordable.