• Hundreds of Nursing Homes Are Closing
• A Look at Nursing Facility Characteristics Between 2015 and 2024
• Understanding Long-Term Care Insurance
• Education and Financial Knowledge in Health-Related Financial Decisions
• Financial Capability Predicts More Positive Health Outcomes
• Long-Term Care Calculator
• Must-Know LTC Stats 2019 Edition and 2020 Edition
  • (Note: I adjusted the statistic(s) in this episode for inflation using the 2019 data linked above)

Here’s a stat you’ve probably heard before.

70% of people turning 65 today will need some form of long-term care services in their lifetime.

That number gets thrown around a lot, especially right before someone tries to sell you an expensive insurance policy.

And while the statistic is technically true, it’s also a bit misleading, because what many people don’t know is that only about 13% of people age 65 today will spend over $180,000 in lifetime, out-of-pocket, long-term care expenses.

And here’s the real kicker.

According to a Morningstar Research study, roughly 63% of people age 65 today will have zero out-of-pocket, long-term care expenses during their lifetime.

In other words, yes, most of us will need some level of care, but only a small percentage are truly at risk for a catastrophic six-figure event.

Now, that doesn’t mean you should ignore it and just hope for the best. Quite the opposite. Everyone needs a long-term care plan, whether that means self-funding, buying insurance, or a mix of both.

So today, I’m walking you through a five-step process to determine if you can confidently self-fund your long-term care needs in retirement.

In other words, can your current retirement savings absorb a long-term care event without the need for insurance?

Welcome to another episode of the Stay Wealthy Retirement Show. I’m your host, Taylor Schulte, and every week, I tackle the most important financial topics to help you Stay Wealthy in Retirement. And now, on to the episode.

Long-Term Care: A 5-Step Process to Determine If You Can “Self-Fund”

Before we dive into the five-step process, I want to address a common misconception that sometimes trips people up.

Many believe that having a certain net worth or a certain portfolio size is a good metric for identifying whether or not you can self-fund for long-term care.

But that’s misleading because if we just look at how much money someone has saved for retirement, we’re ignoring their unique situation, and perhaps most importantly, we’re ignoring their spending rate.

For example, a person with $5 million might appear to have more than enough money to fund retirement and pay for a long-term care event.

But for all we know, they could be significantly overspending and at risk of a health issue putting their retirement plan in jeopardy.

On the other hand, a person with a, let’s say, $500,000 nest egg could be living very comfortably up their savings, pension and or Social Security, have their expenses under control, and be in a strong financial position to absorb a long-term care event.

So because there isn’t an exact formula or even a rule of thumb for determining if a person can self-fund, we have to go through a process, a series of steps in order to arrive at a thoughtful answer that’s unique to your situation.

And just to be extra clear, when you hear the term self-funding or self-insuring for long-term care, it simply means that you’re planning to cover any future long-term care costs yourself, using your own savings, investments or income, instead of buying an insurance policy.

Self-funding, of course, gives you flexibility and control, but it also means that your retirement plan needs to account for these potential expenses, so you’re not forced to dramatically change your lifestyle, or worse, you don’t increase the chances of outliving your nest egg.

Okay, let’s go ahead and break down the five-step process that I’ve documented to help you determine if you can self-fund for this retirement expense.

Step number one is to determine the chances and timing of needing long-term care.

As I shared at the top of the show, most people will need some form of long-term care during their life. However, that doesn’t mean the risk is the exact same for everyone. For example, women have longer life expectancies and are therefore more likely to need care than men. Women also need care for longer periods of time on average. About 4 years compared to 2 years for men.

In addition to gender, family health history, other lifestyle factors play a role as well. And of course, your age matters too.

For example, if you’re listening to this and you’re under age 50, odds are in your favor that a long-term care event probably isn’t around the corner.

But if you’re over age 50 and closer to age 60 or 65, the odds start to increase. Now, that’s not to say if you’re younger, you shouldn’t plan for long-term care. Remember, I said everyone needs a plan. Your plan just might look a little bit different.

For example, after going through this five-step process, you might decide today to be intentional about creating an investment account that’s specifically earmarked for long-term care expenses in the future.

That way, you can self-fund in retirement without having to buy an expensive insurance policy down the road that you may not even use.

Okay, the next step, step number two, is to estimate the cost of a long-term care event.

And the cost of long-term care varies based on where you get your care, your geographical location, the level of care you require, and more.

Now, some of these variables are unpredictable, but to help get you started with this step, there’s a great, easy-to-use cost-of-care calculator that I’ll link to in today’s show notes, which again can be found by going to youstaywealthy.com/twofiveseven.

So I pulled up the calculator, and since Indianapolis, Indiana, is often cited as a city that best represents the average American demographic and falls close to the national average for income and tax rates, that’s the city that I used for this episode’s example.

And here’s what I found.

The annual median cost for in-home care as of 2024 was about $80,000 per year. The annual median cost for an assisted living facility was $65,000 per year. And a private nursing home room was $130,000 per year. Now, keep in mind, those are in today’s dollars.

So, if you’re 55 years old right now, and you don’t anticipate potentially needing long-term care for, let’s say, 20 years, you’re going to need to factor inflation into your calculation.

The calculator that I shared in the show notes will help you do just that for your situation.

But as a quick example, when I ran these projections out to the year 2045, so 20 years from now, I found that the annual median costs are almost double for everything when inflation is factored in.

Instead of $130,000 per year for that private nursing home, the inflation adjusted amount was roughly $241,000 in 20 years.

And remember, that’s just for one person. If both spouses need or want a private room in the year 2045, they’re looking at an estimated $480,000 per year price tag.

Now, before you panic, let’s move to step 3, which is to customize the options and determine a realistic scenario.

For example, you may not need or even want a private nursing home. In fact, fewer and fewer people are choosing nursing homes during long-term care events.

Hundreds of facilities are closing each year as more people opt for in-home care, which is often cheaper and, as you might imagine, more comforting. You may also be in a geographic location that has more affordable options than what I just quoted.

And lastly, you might not consider yourself average. In fact, I don’t think you should. As I’ve shared before here on the show, the fact that you’re listening to this episode right now tells me you’re not average. Instead of watching TV or reading the news, or scrolling Twitter, you’re listening to an educational podcast about retirement planning.

And multiple academic studies have shown that higher financial education leads to not just better financial outcomes in retirement, but also better health outcomes.

In addition to being above average in the financial literacy department, with a current clean bill of health, you might also have great family health history, leading you to assume that the odds are not very likely that you end up in that small percentage of the population that has a large catastrophic long-term care event.

Remember, about 63% of people age 65 today will have zero out-of-pocket long-term care expenses during their lifetime.

Once again, I’m not suggesting that this statistic should lead you to simply wing it and hope for the best. Everyone, and I mean everyone, needs a long-term care plan.

But this step of the process is to evaluate the options available and then determine what a realistic scenario might be for you, and using data can help you make informed assumptions during this phase.

And with your estimated long-term care event cost in hand, customized to your unique situation, step number four is to run a retirement analysis with this event baked into it.

This analysis will help you determine if your current assets are sufficient to fund your retirement goals and support your potential future long-term care costs. Now, how you actually run this analysis will depend on the tools and resources you have access to.

At my firm, we use a mix of financial planning software, tax planning software and custom built spreadsheets to run projections and simulate different scenarios. And in case you’re wondering why tax planning software plays a role here, it’s because taxes touch almost every part of your financial life, including long-term care.

For example, where you pull money from to cover medical expenses in retirement can impact your taxes, which can in turn affect how much your Social Security is taxable, or what you pay for Medicare.

And since there are some really clever strategies to fund medical costs while keeping taxes low in retirement, we always want to make sure that tax planning is baked into this step of the process.

But if you don’t have access to planning software, or you don’t work with a financial planner, you can likely find some free user-friendly spreadsheets online or even check with your custodian, i.e.

Fidelity, Vanguard or Schwab, to see what tools they may have available to you to help you run a retirement planning analysis modeled with a potential long-term care event at some point in the future. But to keep things simple for today, I would just suggest thinking of your projected long-term care costs as just another expense line item in retirement.

The key difference would be that this expense likely won’t last forever, and is also one that you’ll want to assign a higher annual inflation rate than your other spending.

For instance, while general inflation tends to average around 3% per year, long-term care and other medical costs have historically increased closer to 6% or even more annually. So when you’re building your plan, it’s smart to assume a higher inflation rate for this category to better reflect real-world costs.

Through this exercise, if you find out that your current assets are sufficient to cover the cost of a long-term care event in retirement, then you can probably conclude that you can self-fund and skip buying an insurance policy.

Now, I say probably because before you officially arrive at your conclusion, I’d recommend taking your analysis one step further.

And that brings us to step number five, planning for a worst-case scenario.

Up to this point, you’ve estimated your potential cost, customized the assumptions to your situation, and even modeled those costs inside of your retirement plan.

But here’s the thing. No matter how thorough your analysis, none of us have a crystal ball. Life has a way of surprising us, and sometimes those surprises are more expensive than we’d like. That’s why it’s important to stress test your plan.

For example, using the long-term care calculator that I mentioned earlier, and looking at the data on historical long-term care costs, try modeling what a true worst-case scenario might look like for you and or your spouse, if applicable. Then rerun your retirement analysis with those higher numbers to see how your plan holds up under real pressure.

If you’ve done a great job saving for retirement and your expenses are under control, you might find out that even in an extremely unlikely situation, your retirement plan would remain intact.

And that’s often what we find when we run these projections for our clients. And it’s not because our clients are billionaire yacht owners with more money than they can ever spend. It’s because they’ve been diligent savers. They’ve worked hard to retire debt-free. Their expenses are under control.

And in many cases, they have other guaranteed income sources like Social Security or pensions that help take pressure off their retirement savings and investments.

Now, if you do find out that a worst-case scenario would wipe out your retirement plan, that doesn’t necessarily mean that you cannot self-fund.

The first thing I would do before you race out and buy an expensive insurance policy is to figure out what you would need to do in that situation to get your plan back on track and recover from that event.

For example, what if you downsized your home or dramatically cut expenses in other categories? Or if you’re still working, what if you retired a few years later, giving you some more time to pad your retirement savings?

And then finally, I never like to really suggest or recommend this, but for some people, it is a reality, and that is maybe your children are in a really strong financial position, and through conversations with them, they agree that they would be able to step in and help with the cost if an extreme, rare event were to happen.

Even if someone is on a great track for retirement, we always like to see where their plan breaks down.

And then from there, we like to figure out what it takes to recover from that breakdown.

In my experience, this exercise, even with extremely healthy plans, helps give our clients confidence in their retirement plan, knowing that we have a plan in place for worst-case scenarios.

If a rare, unexpected event were to happen, and the results put their retirement plan in jeopardy, well, we have a plan for getting them back on track.

It’s already been tested and documented. We don’t have to scramble in the heat of a difficult moment to determine what actions we should take in response.

Now, I just mentioned that we often find that most of our clients can sell fund for long-term care after going through this exercise. However, that doesn’t necessarily mean that they all skip buying insurance. And that’s because choosing to sell funds still carries risk.

For example, maybe the cost of care increases by more than anyone could have predicted, or the timing of a long-term care event collides with a deep, dark economic recession, or other expenses end up creeping into a client’s life that we didn’t plan for, like caring for a child or a grandchild.

The bottom line is this, long-term care planning is not about predicting the future or trying to outsmart every possible scenario. It’s about stacking the odds in your favor by understanding the risks, knowing your options, and making decisions that fit your values and your financial reality. And while many people are quick to assume that long-term care insurance is the only responsible path forward, that’s not necessarily true.

For diligent savers who have built strong retirement foundations, self-funding can be a perfectly reasonable and often more flexible option. It gives you control over how and where you receive care, and it allows you to adapt as your circumstances change.

Still, I would suggest thinking of this planning topic less as a binary choice and more as a spectrum. Full insurance on one end, self-funding on the other, and a range of hybrid strategies in between.

Whatever you decide, the real goal is peace of mind, knowing that you’ve done the hard work up front, that you’ve modeled the possibilities, and that you have a plan for both the expected and the unexpected. Because when you’ve taken the time to test your assumptions and stress test your plan, you’re no longer reacting out of fear or uncertainty.

You’re leading with clarity and confidence.

So as you think about your own long-term care plan, just remember, it’s not about if something happens. It’s about how you’ll handle it when it does.

The earlier you start this process, the more control you’ll have over your options, and the more freedom you’ll have to enjoy the years ahead without second-guessing every decision.

By the way, if you need and want professional help with evaluating your long-term care needs and building a fully coordinated retirement and tax plan, my team and I would be honored to have a conversation to see if we’d be a good fit to work together. You can follow the link in the episode description right there in your podcast app to schedule a free retirement strategy session.

Thank you as always for listening, and once again to view the research and resources referenced in today’s episode, just head over to youstaywealthy.com/257.

Disclaimer

This podcast is for informational and entertainment purposes only, and should not be relied upon as a basis for investment decisions. This podcast is not engaged in rendering legal, financial, or other professional services.