'Underestimated' Retirement Plan Risk Too Many People Ignore

Underestimated long-term health care costs significantly impact both family dynamics and finances, potentially leading to strained relationships and depleted savings. Proactively addressing these costs in your retirement plan is essential for ensuring emotional and financial well-being during one's golden years.

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'Underestimated' Retirement Plan Risk Too Many People Ignore
13 Min Read May 15th, 2023 Updated:January 21st, 2024

The golden years of retirement should be a time to relax, enjoy life, and indulge in the hard-earned fruits of one's labor. Yet, for an increasing number of retirees, a lurking, often underestimated risk threatens to disrupt these idyllic plans. 

As the population ages and life expectancies continue to rise, an essential but frequently overlooked aspect of retirement planning is taking center stage: the potentially devastating impact of long-term health care costs on one's financial security.

Surprisingly, despite the skyrocketing costs of long-term health care and the growing awareness of the challenges faced by an aging population, many people remain unaware of the potential consequences of failing to plan for long-term care. 

Multiple Issues with Underestimated Impact of Future Long-Term Care

This oversight can lead to financial strain, emotional turmoil, and even the erosion of a lifetime's worth of savings. People ignore this risk for several reasons, including the unfounded belief that they will never need help with daily living activities or suffer from dementia. According to the federal government and common sense, about half of us will need long-term health care if we reach age 65.

Many individuals continue to believe that traditional health insurance, including Medicare and supplemental plans, will cover the high costs associated with long-term care. However, it's crucial to understand that these plans typically only pay for skilled services such as rehabilitation, and even then, only for a very limited duration.

Others assume that they can personally finance the future expenses of long-term care services or rely on family members to leave their jobs and take on the role of caregivers. Neither of which is realistic.

There is little doubt about the underestimated risk of long-term health care costs and how they can adversely impact your future retirement. These costs will adversely impact your income, assets, lifestyle, and legacy unless you have implemented a plan to address the costs and burdens of aging and future declining health. 

This article will delve into the consequences of an aging population and future declining health while highlighting the importance of taking a proactive approach to retirement planning that includes accounting for long-term care expenses.

Understanding and addressing this often-neglected aspect of retirement planning is crucial for securing a comfortable and worry-free retirement. By recognizing the potential challenges that lie ahead and taking steps to mitigate them, you can ensure that your golden years remain as bright and fulfilling as you deserve.

Will You Really Need Long-Term Health Care?

As you go about your day, you cannot help but notice the growing number of people needing long-term health care. You see them using walkers and wheelchairs, getting in-home health care, and being taken to adult day care centers, assisted living facilities, and nursing homes. Those facilities are being built all over the country, and they are filling up quickly.

It's a reality that many of us will face at some point in our lives. As we live longer, we're more likely to develop chronic health conditions that require long-term care. And the cost of long-term care is rising, putting a strain on families and finances.

Matt McCann, a renowned authority on long-term health care planning, emphasizes that increased life expectancy and advancements in medical science are contributing to the growing demand for long-term care worldwide.

Yes, the reality is if you live a long life, it is reasonable to assume that you need long-term health care, and the consequences impact your family and finances.

The U.S. Department of Health and Human Services (HHS) says about half of those who reach age 65 will need long-term health care services. This data is based on a study conducted by the Assistant Secretary for Planning and Evaluation (ASPE). The study used microsimulation modeling to estimate the number of people needing long-term care services at different ages. The study found that about half of people who turn 65 today will need long-term care services at some point in their lives. The need for long-term care services is highest among older people with chronic health conditions or disabilities.

As you grow older, you may notice changes in your health. The emergence of chronic illnesses, mobility challenges, dementia, and increased frailty can heighten your need for assistance with everyday tasks or supervision due to cognitive decline.

The study also found that the cost of long-term care services is rising. The average cost of a year of nursing home care is now over $100,000. Home care costs are also rising but are still less expensive than nursing home care.

The LTC NEWS Cost of Care Calculator illustrates the anticipated growth in long-term care expenses in the coming years. The cost of care can vary based on the specific services you need and your location.

LTC NEWS Cost of Care Calculator - Find Your Location

The HHS report is a reminder that long-term care is a significant issue to consider when planning for your retirement. The report also highlights the need to address the costs and burdens of aging.

Self-Funding Long-Term Care Costs Have Unintended Consequences 

Relying solely on your 401(k) and other savings to cover future long-term health care costs can be a risky strategy. Several factors can undermine this approach's effectiveness, including market timing, tax consequences, and the rising costs of long-term care.

Dave Littell, a retirement income expert and professor emeritus of taxation at The American College of Financial Services, says there are challenges and potential pitfalls of self-funding long-term care costs.

People underestimate the cost of long-term care, and they underestimate the probability that they will need it. They underestimate the cost of it once they need it, and they overestimate their ability to pay for it.

Market timing plays a significant role in the success of depending on your 401(k) and other investments to fund long-term care. When the need for care arises, you may find yourself in a situation where the markets are experiencing a downturn. Selling your assets in a declining market not only reduces your overall financial resources but can also lead to capital gains taxes when realizing a profit.

The tax consequences of liquidating assets to pay for care yourself can be substantial. Capital gains taxes can erode your savings further, leaving you with less money to cover long-term care expenses. Even a loss can still be a taxable gain. 

CPA and personal finance specialist Tim Steffen told CNBC that the tax consequences of utilizing taxable accounts to fund long-term care expenses could be significant.

Generally, when you take money out of an account that's taxable to pay for long-term care costs, that distribution is going to be taxed as well. So now you're dipping into your account not only to pay for the cost of care but also to pay the taxes on the money you're taking out.

More Unintended Consequences

Additionally, selling assets to pay for your care will increase your income, which can have unintended consequences on your Medicare Part B premiums.

Medicare Part B premiums can be means-tested and increase if retirement income increases. The amount of the increase depends on your modified adjusted gross income (MAGI) as reported on your IRS tax return from two years ago.

If your MAGI is above certain levels, you will pay an Income-Related Monthly Adjustment Amount (IRMAA) on top of the standard Part B premium. The IRMAA amount is calculated based on your MAGI and filing status. This additional expense can strain your finances and increase your expenses if you self-fund long-term health care (unless you are self-funding from income or cash.)

Medicare Part B Premiums | SSA

No matter, if you are using your money, it can no longer be used to create retirement income, be used for your lifestyle, or be part of your legacy for children, grandchildren, and other inheritance priorities. 

Furthermore, don’t forget the cost of long-term health care continues to rise rapidly. As the demand for long-term care services increases, so do the associated expenses. This escalation in costs can quickly outpace your savings and investments, leaving you struggling to cover the necessary care for yourself or a loved one.

Considering these factors, it is evident that depending on your 401(k) and other savings alone to pay for future long-term health care may not be a viable strategy. 

LTC Insurance Plays Big Role in Asset Protection and More

A more comprehensive approach to long-term care planning is desirable. Long-Term Care Insurance policies are designed specifically for these needs, can help protect your retirement savings, reduce financial risks, and ensure that you receive the quality care you deserve.

Partnership Long-Term Care Insurance is a unique type of long-term care insurance that provides extra asset protection for policyholders. 

What Is the Partnership Program in Long-Term Care Insurance?

Developed through a collaboration between state governments and private insurance companies, these policies are designed to encourage individuals to take responsibility for their long-term care needs while preserving their assets and ensuring access to quality care.

One of the key features of Partnership Long-Term Care Insurance is dollar-for-dollar asset protection, also known as asset disregard. This feature allows policyholders to protect an amount of their assets equal to the insurance benefits they receive. For example, if a policyholder uses $300,000 in long-term care insurance benefits, they can protect an additional $300,000 of their assets from being considered when determining eligibility for Medicaid. 

This protection enables individuals to maintain a higher level of financial security, knowing that their assets will be preserved even if their long-term care needs exceed their insurance coverage.

Additionally, Partnership Long-Term Care Insurance policies include inflation protection, ensuring that the policy benefits grow over time to keep pace with the rising costs of care. This feature gives policyholders the confidence that their coverage will remain relevant and adequate as they age, further safeguarding their assets and financial well-being. 

Those With Substantial Assets Still Need to Consider Long-Term Health Care

Individuals with substantial assets, such as those tied up in businesses and investments, are not immune to the financial impact of long-term health care costs. In fact, their financial situation can be even more complex and challenging when it comes to funding long-term care. These complexities can arise from various factors, including liquidity constraints, tax implications, and the need to preserve wealth for future generations.

One of the primary challenges for individuals with significant assets in businesses and investments is liquidity. When the need for long-term care arises, accessing the funds tied up in these assets can be both time-consuming and costly. For instance, selling off shares in a business may require finding a suitable buyer, which could take time and potentially force the owner to accept a lower price than desired. Similarly, liquidating investments during unfavorable market conditions can result in losses and have long-term repercussions on one's overall financial health.

Additionally, the tax implications of selling assets to fund long-term care can further erode one's wealth. As discussed earlier in this article, capital gains taxes may apply when selling investments or business interests, reducing the net proceeds available for care. Moreover, the increased income generated by these sales can lead to higher Medicare premiums and potentially subject the individual to additional taxes.

Preserving wealth for future generations is another concern for those with substantial assets. This concern becomes particularly relevant for those who wish to pass on a family business or other significant investments to their children or grandchildren. The high costs of long-term health care can quickly deplete one's wealth, leaving less for their heirs and potentially undermining financial stability.

Individuals with substantial wealth should consider integrating Long-Term Care Insurance into their financial strategy to mitigate risks and safeguard their assets. Hybrid policies, which combine life insurance or annuities with long-term care benefits, are frequently utilized by those with significant wealth. 

By repositioning a relatively small amount of money, these individuals can generate a much larger sum of guaranteed, tax-free long-term care benefits. Additionally, upon death, a death benefit is provided. These products help protect one's wealth, offer tax advantages, and ensure access to high-quality care when necessary.

Long-Term Care is More Than Just About Money – It’s About Family

Long-term care is not just a financial concern; it also has profound emotional and physical consequences on the entire family, especially the spouse and adult children. When an individual requires long-term care, their loved ones often face considerable emotional strain, logistical challenges, and caregiving responsibilities. Recognizing these non-financial implications is crucial to understanding the true impact of long-term health care.

The spouse, who is typically older when their partner requires care, may be confronted with physical and emotional limitations of their own. They might struggle to provide the necessary level of care, which can be physically demanding and time-consuming. The caregiving spouse might experience feelings of helplessness, guilt, and even resentment, as their role shifts from a partner to a caregiver. Often they feel trapped inside their home providing care.

The emotional toll of this new dynamic, combined with the potential financial burden, can significantly strain the marital relationship and the well-being of both spouses.

Adult children are also affected when a parent requires long-term care. In the absence of an advanced plan, they may be forced to step in and manage the situation, providing care and often juggling their own careers, families, and personal lives. This can lead to a sense of "caregiver burnout" as they try to balance their responsibilities, leading to stress, exhaustion, and emotional distress.

Moreover, adult children may be faced with making difficult decisions on behalf of their parents, such as choosing which assets to liquidate or determining the most appropriate care setting. These decisions can be further complicated by differing opinions among siblings, potentially leading to family conflicts and strained relationships. Additionally, adult children may feel guilt or regret if they believe they cannot provide the level of care their parents deserve.

Planning Now is Key

In light of these non-financial consequences, long-term care planning is essential for ensuring that an individual's care needs are met while minimizing the emotional and physical burden on their loved ones. Long-Term Care Insurance is an easy and affordable solution.

By proactively addressing the potential need for long-term care and exploring insurance options, you can protect your financial well-being and support your spouse's and adult children's emotional well-being. In doing so, they can help their family navigate the challenges of long-term care with greater resilience, understanding, and peace of mind.

As society witnesses an increase in life expectancy and medical advancements, long-term health care planning becomes essential to a comprehensive financial strategy. The "underestimated" retirement risk of future long-term care should not be ignored. The need for care is real, and the risk increases with age. 

By exploring innovative insurance solutions like Partnership Long-Term Care Insurance, hybrid policies, and other LTC Insurance options can safeguard hard-earned assets, guarantee access to top-notch care, and minimize the emotional and relational strain on families. By boldly confronting this risk and weaving it into your retirement plans, you can confidently stride into your golden years, knowing you have secured a financially stable and fulfilling future for yourself and your loved ones.

Don't hesitate; the ideal time for planning is during your 40s or 50s when you're in good health, enabling you to benefit from lower premiums and a wider range of options.

Long-Term Care Insurance specialist will assist you with shopping and policy design. They will match you with the best options and provide accurate quotes from all the top-rated insurance companies, along with professional recommendations.

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About the Author

An LTC News author focusing on long-term care and aging.

LTC News Contributor James Kelly

James Kelly

Contributor since August 21st, 2017

Editor's Note

When planning for the costs and burdens of aging, there are various Long-Term Care Insurance products to consider. However, it is crucial to ensure that the product you choose complies with federal guidelines under Section 7702(b) of the U.S. Code. By doing so, you can rest assured that your policy will include the following:

  • The necessary consumer protections.
  • Regulated benefit triggers.
  • Tax incentives 

 A qualified Long-Term Care Insurance policy will offer a comprehensive long-term health care plan which will safeguard income and assets, ensure quality care options, and ease the stress and burdens otherwise placed on those you love.

What Are Long-Term Care Insurance Regulations? How Do They Protect Policyholders?

The significance of Long-Term Care Insurance should not be underestimated. As the cost of long-term health care skyrockets nationwide, assessing its financial impact on your lifestyle and legacy becomes a top priority. Equally important, though, are the consequences placed on family members.

By securing an LTC policy, you establish a plan that allows your family to maintain their roles as loved ones rather than becoming caregivers or care managers.

Given that these products are medically underwritten and partially priced based on the age at which coverage is obtained, the optimal time to secure a policy is during your 40s or 50s. Nonetheless, it is your current good health that enables you to plan.

What Is Underwriting In Long-Term Care Insurance?

Seek Help from a Qualified Long-Term Care Insurance Expert

An expert LTC Insurance specialist will tailor solutions to your specific health and financial situation, ensuring you find the most cost-effective options. By understanding your needs and evaluating your health history, a Long-Term Care Insurance specialist will present you with accurate quotes from leading insurance providers.

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Available Research Tools and Resources on LTC NEWS

There are a variety of tools and resources that LTC NEWS offers that can help you in your research:

  • The Ultimate Long-Term Care Insurance Guide - If you like details, you will enjoy this comprehensive guide to LTC Insurance. 
  • Cost of Care Calculator - Choose Your State - You can find the current and future cost of long-term health care services where you live.
  • Frequently Asked Questions - Get the answers to the most often asked questions about long-term health care planning and LTC Insurance.
  • Filing a Long-Term Care Insurance Claim - Does a loved one - like your Mom or Dad - have a Long-Term Care Insurance policy and need to file a claim to get benefits? LTC NEWS will help. If they don't have a policy, but you need help in getting a plan of care and finding caregivers, LTC NEWS can also assist.
  • Reverse Mortgages - Learn about reverse mortgages and ask questions about how they work and if you or a loved one would benefit from one. 

Finding Quality Caregivers

Resources like the LTC NEWS Caregiver Directory offer invaluable assistance for those seeking caregivers for older family members. The directory is a free, comprehensive national database with a wide range of long-term care services, simplifying finding qualified caregivers or appropriate care facilities. You can search for providers where you or your loved one lives and read about their qualifications and options. 


For those with an LTC policy, LTC NEWS can help process claims from any Long-Term Care Insurance policy. LTC NEWS, in partnership with Amada Senior Care, a nationally recognized in-home health care agency, ensures that you and your loved ones receive the quality care you deserve. This service comes at no cost or obligation - Filing a Long-Term Care Insurance Claim.

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