Want to Self-Fund Your Long-Term Care? Read This!

Apr 11

Self-funding long-term care Vision Retirement financial planning independent RIA CFP fiduciary investment advice investment management New Jersey New York Bergen county financial advisor Ridgewood NJ

The U.S. Department of Health and Human Services claims there’s an almost-70% chance that a person celebrating a 65th birthday today will require some form of long-term care (LTC) services in his or her remaining years; and, as with most healthcare costs, long-term care isn’t getting any cheaper. Depending on your needs, you can spend up to $108,405 annually for a private room in a nursing home facility (according to Genworth and other related sources). While you can rely on a few different options to cover your potential long-term care expenses, this specific post will delve into self-funding (also known as “self-insuring”) opportunities.

Long-term care, defined

Long-term care (LTC) is defined as help you may need with “activities of daily living” (or ADLs) due to injury, health, or cognitive impairment resulting from conditions such as dementia, memory loss, or Alzheimer’s. Such activities include bathing, dressing, eating, toileting, continence, and transferring (walking or moving oneself from a bed).

Long-term care and long-term disability are not one in the same

It’s also important to note that long-term care insurance is very different from long-term disability (LTD) insurance.

First and foremost, LTD insurance is designed to replace a portion—often 40 to 60%—of income you’ll lose if an injury/illness prevents you from working. Ranking behind musculoskeletal disorders (e.g., fractures and joint disorders), cancer, pregnancy-related complications, and mental health issues such as depression and anxiety are the most common reasons for long-term disability claims. Cardiovascular and circulatory disorders (e.g., heart attacks and coronary artery disease) are also sometimes covered by these policies.

People often purchase LTC insurance policies, meanwhile, for coverage specifically during their retirement years and to cover the cost of a nursing home or home health aide should they become unable to care for themselves.

The odds of needing long-term care

As mentioned earlier, U.S. Department of Health and Human Services data reflects that someone turning age 65 today has an almost-70% chance of needing some form of long-term care (LTC) services in his or her remaining years. What’s more, women are expected to need 3.7 years of care compared to 2.2 years for men. An estimated 20% of today’s 65 year olds will require care for more than 5 years.

As for the type of care needed, 65% of people rely on home-based long-term care services for an average of two years—often involving help with bathing, dressing, taking medications, and supervision—so they can live as independently as possible in the comfort of their own home. The other 35% who utilize LTC services spend (on average) a year in facilities such as nursing homes or assisted living facilities.

Self-funding long-term care costs

If you plan on dismissing the option to either take out an individual LTC policy or add a rider to your life insurance, you’ll need to have ample retirement funds at your disposal should the need for long-term care arise.
While we can’t tell you exactly how much money you’ll need to self-fund long-term care, we can share various costs to help you plan. For example, according to Genworth, national monthly median costs are as follows (with the previous year’s data noted in parenthesis):

· Home health aide: $5,148 ($4,576)

· Adult daycare: $1,690 ($1,603)

· Assisted-living facility: $4,500 ($4,300)

· Nursing home, private room: $9,034 ($8,821)

· Nursing home, semi-private room: $7,908 ($7,756)

In this scenario, those requiring one year of at-home care and one year in a semi-private nursing home would need to shell out over $156,000 to cover the corresponding cost.

You should also keep in mind that these costs will of course increase as the years march on (as indicated above in parentheses). For example, in 2004, the median annual cost of a home health aid was $42,168; this figure jumped to $61,776 in 2021. Compounded with the fact that the U.S. has a rapidly aging population, this will only help further ignite inflationary pressures as they relate to long-term care.

Self-funding options can make long-term care more affordable

Thankfully, you can rely on various options to save more for long-term care expenses. Some popular strategies include:

Opening a health savings account
Consider enlisting the help of a health savings account (HSA), a type of savings account you can use to pay for qualified out-of-pocket healthcare expenses including deductibles and copays. These accounts are specifically designed to help people with high-deductible health insurance plans (HDHP) pay for such expenses. One of its most appealing features? Unlike a flexible spending account, any money left in your HSA account at the end of each year simply rolls over: providing a great way to save for future healthcare costs.

Delaying Social Security benefit claims
Another option to help save for future healthcare expenses is to delay taking your Social Security benefits. While you can collect benefits as early as age 62, you will receive a higher amount (about 7%) for every year you wait until reaching your full retirement age (FRA) when you first become entitled to a full Social Security benefit. Moreover, there is an (approximately) 8% increase for every year you wait between your FRA and age 70.

To illustrate, let’s assume your monthly Social Security benefit is $1,000: the amount you’d receive if you wait until your full retirement age. If you claim benefits at age 62, though, your Social Security benefit would be approximately 30% lower ($700) than it would at your FRA. As you can see, collecting too early means you could miss out on thousands of dollars a year to help cover healthcare expenses.

Utilizing catch-up contributions
If you’re age 50+ but didn’t save enough money for retirement when you were younger, you’ll be happy to know the IRS established rules to help make up for this shortfall via “catch-up contributions”: additional contributions you can make to your 401(k) and IRA accounts above the standard limits.

For 2024, these limits are an additional $7,500 per year for your 401(k) and $1,000 for your IRA (or a total of $8,500 for those with both accounts).

Be sure to take advantage of these benefits if it makes sense for your overall plan; because even if you save an extra $3,000 a year ($250 a month) for 15 years and average a 4% return, you’d accumulate more than $61,000 in additional savings for retirement by doing so.

Medicare, Medicaid, and long-term care considerations

One strategy some people briefly consider is to self-fund until they’re eligible for Medicare. We say “briefly” because—quite frankly—this option won’t work. Except in very limited circumstances, Medicare doesn’t cover long-term care expenses.

You can, however (if you’re eligible), rely on Medicaid to cover many at-home or in-facility expenses associated with long-term care. Keep in mind, however, that risks accompany this route and you must therefore plan accordingly.

For example, in this scenario, you won’t have access to a preferred treatment facility like you would with an LTC policy or via self-funding—as Medicaid provides limited options. Medicaid also imposes strict asset requirements, and while these vary by state, most set a limit of $2,000 for a solo applicant and $3,000 for a couple (with one’s primary residence and retirement accounts sometimes exempt). You’ll therefore need to ensure you don’t unnecessarily (or improperly) spend down non-exempt assets such as savings and brokerage accounts, especially if you’re planning to pass something down to heirs. Finally, states are required to attempt to recover some (if not all) long-term care benefits from a Medicaid recipient’s estate after his or her death—provided there is no living spouse, minor, or disabled person living in the home. You’ll thus need to protect your home accordingly, generally through a trust or estate.

In sum: acting as your own long-term care insurer

Estimating long-term care costs is a tricky business, especially since everyone has different needs that will likely vary with respect to costs. That’s precisely why we recommend speaking with a financial advisor before you make any LTC self-funding decisions, helping you feel more confident that you’re taking the right approach.

Still have questions about your long-term care options? Schedule a FREE Discovery call with one of our CFP® professionals.

FAQs

Yes! Beginning in 2025, employees will enjoy the ability to withdraw up to $2,500 from their company’s retirement plan to pay for long-term care insurance. The permitted amount is either up to 10% of the vested plan balance or $2,500 (whichever is lower).
Answers to this question vary. For example, even though traditional IRA withdrawals are subject to taxes, some investors keep funds in this type of account to cover LTC expenses—typically because the potential tax liability is sometimes offset by medical expense deductions individuals will likely qualify for if extensive long-term care is needed.
For other investors, allocating funds to a traditional IRA is perhaps be too risky, especially if LTC expenses quickly pile up; the more money you pull out every year, the more income you’re making. This can potentially push you into a higher tax bracket, draining your accounts much faster than you had anticipated. Speaking to a financial advisor about how to best allocate your funds is the best approach here.
Low-income individuals and veterans can thankfully lean on several resources to help cover long-term care costs. One such option is Medicaid, which offers financial assistance for assisted living services and in-home care; eligibility requirements vary by state, but generally, one’s income must fall below a specific monthly threshold (e.g., $2,829 in New Jersey), with an asset ceiling in place as well (e.g., $2,000). Note that spouses of applicants have their own income and asset allowances. Veterans, meanwhile, can enlist the help of a largely untapped pension benefit called Aid and Attendance that provides financial support for long-term care. This program has its own set of requirements—including income limits—and can be challenging to navigate.