Long-Term Care Risk

Posted September 30, 2025, By Cole Ferrier

Key Takeaways:

• Long-Term Care (LTC) Risk is the danger that you or a spouse will need extended help with daily living activities due to a chronic illness, disability, or cognitive impairment, and the catastrophic costs will deplete your retirement savings.

• The single biggest misconception about LTC is that Medicare will pay for it. Medicare does not cover long-term custodial care, which is the majority of LTC services.

• The financial, emotional, and physical burden of care often falls on unpaid family members, primarily spouses and adult children, impacting their own careers and well-being.

• Mitigating this risk involves a conscious decision between self-funding (for the very wealthy), transferring risk through traditional or hybrid LTC insurance, or relying on Medicaid as the safety net of last resort.

In our series on retirement risks, we’ve debugged the foundational challenges of a long life and rising costs. Now, we confront the risk that represents their most dangerous intersection: Long-Term Care (LTC) Risk.

If Health Expense Risk is a persistent bug that drains resources, LTC Risk is a potential system-wide catastrophic failure. It is the single largest, non-market financial threat that can completely derail a retirement plan, turning a multi-million dollar portfolio into a source of payment for a nursing home. More than just a financial problem, it is a deeply human one, impacting the physical, emotional, and financial health of the entire family.

From my engineering perspective, planning for retirement without a strategy for long-term care is like building a sophisticated data center on a floodplain without any waterproofing. It might function perfectly for years, but a single, predictable event can cause a total system loss. A durable retirement blueprint must have a disaster recovery plan, and that plan starts with confronting the realities of LTC.

By the Numbers

• 70%: The approximate percentage of people turning 65 today who will need some type of long-term care services in their remaining years. (Source: U.S. Department of Health and Human Services, "How Much Care Will You Need?," LongTermCare.gov, February 2020)

• $108,405: The median annual cost for a private room in a U.S. nursing home in 2021. The median cost for a home health aide was $61,776 per year. (Source: Genworth, "Cost of Care Survey," 2021)

• 80%: The percentage of care provided at home that is delivered by unpaid caregivers, primarily family members, who provide an average of 20 hours of care per week. (Source: "Retirement Risk Solutions," The American College of Financial Services, 2017)

From the Case Files

Meet James and Maria, a couple in their late 70s with a well-funded retirement. When James was diagnosed with Alzheimer's, their plan began to unravel. At first, Maria provided all the care, but as the disease progressed, she became exhausted. They hired a part-time home health aide, an expense of over $30,000 a year they hadn't budgeted for. Eventually, James needed full-time care in a memory care facility, costing over $120,000 annually. Within four years, they had spent over $400,000 of their investment portfolio, selling assets during a volatile market. The financial strain was immense, but the true cost was the emotional and physical toll on Maria, who worried constantly about both her husband's health and her own financial future.

Understanding the Risk: It's Not Medical Care

The first step in planning for LTC is understanding what it is—and what it isn't. Long-term care is not the same as medical care. It is primarily custodial care, which means help with the basic Activities of Daily Living (ADLs):

• Bathing

• Dressing

• Eating

• Toileting (getting on and off the toilet)

• Continence

• Transferring (getting in and out of a bed or chair)

Benefits from LTC insurance policies are typically triggered when a licensed health practitioner certifies that you are unable to perform at least two of these six ADLs or you have a severe cognitive impairment like Alzheimer's. Because this is not considered "skilled" medical care, Medicare does not cover it. This is the critical fact that most people miss.

The Impact on Your Plan: A Multi-System Failure

An unplanned LTC event is a cascading failure that stresses every part of your financial blueprint.

• Interaction with Longevity Risk: A long life is a wonderful thing, but it is also the primary driver of LTC risk. The longer you live, the higher the statistical probability that you will need extended care. An 85-year-old is at far greater risk than a 65-year-old.

• Interaction with Family-Related Risks: LTC often triggers Loss of Spouse Risk and Unexpected Financial Responsibility Risk. The healthy spouse often becomes the primary caregiver, a role that can be physically and emotionally devastating, sometimes leading to their own health declining. If there is no spouse, the burden often falls to adult children, derailing their careers and finances.

• Catastrophic Asset Depletion: The cost of care can force massive, unplanned withdrawals from your portfolio, triggering both Excess Withdrawal Risk and Sequence of Returns Risk. For a high-net-worth family, it can completely undermine a legacy plan, converting an inheritance into a source of funding for a nursing home.

Solutions & Your Risk Mitigation Toolkit

You cannot know if you will need LTC, but you can have a plan for how to pay for it if you do. This is one area where the "great balancing act" is most stark. The choice is between retaining the risk yourself or transferring it at a known cost.

• Tool #1: Self-Funding. This strategy involves earmarking a significant portion of your assets to cover potential LTC costs. This is a viable option primarily for the affluent who have a large enough portfolio to absorb a multi-year, six-figure annual expense without jeopardizing their lifestyle or a surviving spouse's security. The trade-off is that you are tying up a large amount of capital that could otherwise be used for other goals, and you are bearing 100% of the financial risk.

• Tool #2: Traditional Long-Term Care Insurance (LTCI). This is the classic risk-transfer tool. You pay an annual premium to an insurance company in exchange for a dedicated pool of money to cover future LTC expenses. While premium increases on older policies have been a concern, modern policies are priced more sustainably. The primary benefit is leverage: you can secure a large potential benefit for a fraction of the cost.

• Tool #3: Hybrid (Asset-Based) Policies. These products address the "use it or lose it" concern many people have with traditional LTCI. They are life insurance policies or annuities with LTC riders.

  • How they work: If you need long-term care, you can accelerate the death benefit or annuity value to pay for it, tax-free. If you never need care, your heirs receive a life insurance death benefit or a remaining annuity value. If you change your mind, many policies offer a return-of-premium feature.

  • The Trade-off: The premiums for these policies are typically higher than for traditional LTCI to account for the fact that the insurer will pay out a benefit one way or another.

• Tool #4: Government Programs. For those with limited assets, Medicaid is the safety net of last resort. To qualify, you must spend down nearly all of your assets, a process that can leave a healthy spouse in a difficult financial position. This is not a planning strategy, but a last resort. Separately, as my blog has discussed, Washington's Charity Care law is a powerful tool for hospital bills but does not apply to custodial long-term care.

A Strategic Framework for Long-Term Care

Strategically, a long-term care event represents a catastrophic financial shock with the potential to rapidly and completely deplete a lifetime of savings. A retirement plan is most vulnerable when it lacks a dedicated funding strategy for this specific risk, forcing the primary investment portfolio to absorb a cost it was never designed to handle.

A resilient plan isolates this threat by creating a dedicated funding mechanism. The core decision is whether to self-fund, a strategy viable only for the very wealthy, or to implement a risk-transfer strategy using traditional or hybrid long-term care insurance . This approach creates a separate, protected pool of capital, insulating the main portfolio from this catastrophic risk and allowing it to continue funding your planned lifestyle .

Conclusion: The Great Balancing Act

Ultimately, planning for long-term care isn't about finding a single perfect answer; it's about navigating a series of trade-offs. The great balancing act of your plan is deciding where you fall on the spectrum between transferring risk and retaining control. Do you pay a known, manageable premium now to protect against an unknown, potentially catastrophic cost later? Or do you self-fund and retain full control of your assets, accepting that you are also retaining 100% of the risk? There is no single right answer, only the one that aligns with your resources, your risk tolerance, and your desire for peace of mind for yourself and your family.

Create Your Financial Compass with Us

The conversation about long-term care is one of the most important—and most difficult—parts of building a retirement plan. We can help you understand the risks, quantify the potential costs, and navigate the solutions to build a plan that protects both you and your loved ones. Contact us today.

Resources:

• LongTermCare.gov: A website from the U.S. Department of Health and Human Services with comprehensive information on understanding and planning for LTC. (www.longtermcare.gov)

• National Clearinghouse for Long-Term Care Information: A resource to help you and your family plan for future long-term care needs.

• Family Caregiver Alliance: A national nonprofit that provides support, education, and advocacy for family caregivers. (www.caregiver.org)

• Genworth Cost of Care Survey: An interactive tool to look up the median cost of care in your state and local area. (www.genworth.com/aging-and-you/finances/cost-of-care.html)