Guarding Your 401(k) and Nest Egg Against the Rising Tide of Long-Term Care Costs

Safeguarding your 401(k) and assets from long-term care costs is essential to ensuring a comfortable retirement. By planning for the future, you can allow your loved ones the freedom to be family instead of future caregivers.
Updated: March 23rd, 2024
James Kelly

Contributor

James Kelly

The retirement dream for many is simple: enjoy your golden years with financial security, live comfortably, and leave something meaningful for your children and grandchildren. However, there's a looming threat to this dream that many of us face: the rising cost of long-term care.

As you navigate the path to retirement, a rising tide of long-term care costs looms large, potentially reshaping the serene retirement shores you've envisioned. This looming wave isn't just a threat to your hard-earned nest egg; it's a burden that could deeply impact your family's harmony and security. It's a journey many of us will face but often not plan for.

The Pitfalls of Self-Funding Your Long-Term Care

As we live longer, thanks to medical advancements, the likelihood of requiring long-term care increases. Many individuals assume that their saved assets, including their 401(k), will suffice to cover these costs. 

However, for many Americans approaching their 50s, the retirement dream is almost tangible, but the cushion of savings they've built might not be enough to support that dream, especially if long-term care expenses are not factored into the retirement equation.

By age 50, Fidelity Investments suggests having roughly six times your annual salary tucked away for retirement. That means if you're bringing in a yearly income of $115,000, your retirement account should ideally boast around $690,000.

Recent data from Fidelity Investments Q2 2023 Retirement Analysis reveals that, on average, Americans between 50 and 59 years old have about $189,800 saved in their 401(k)s.

Even if you have $700,000 in your 401(k), will that be enough to fund retirement and address the future costs and burdens of aging as long-term care costs are increasing rapidly nationwide?

Do You Have Enough?

Cassandra Watson, a renowned authority on long-term care planning, is the President of Platinum LTC Solutions, a leading national agency featuring Long-Term Care Insurance experts. Frequently, Watson engages in conversations with individuals contemplating self-funding their long-term care needs. These discussions are intriguing, she notes, as the financial landscapes of those considering self-funding vary widely.

A person smiling at camera.

I have spoken with people with assets of $750,000 who were convinced they could self-fund, and other times, I have assisted clients with north of $8-10M in purchasing the best long-term care coverage available. In my experience, self-funding is a fancy way of saying, "I don't want to have a plan; I want to hope this doesn't happen.

Self-funding future long-term care carries substantial risks:

  1. Jeopardizing Future Retirement Income: Tapping into your 401(k) or other assets prematurely could severely limit your future retirement income. This could necessitate lifestyle changes, perhaps moving to a less expensive home or area or even cutting back on activities you love.
  2. Legacy Concerns: Many of us cherish the idea of leaving a gift for our children or grandchildren. It's not always about their needs but our desire to pass on something special. Yet, if long-term care depletes our resources, the legacy we hoped to leave might be significantly reduced or even disappear.
  3. The Unknowns: The duration and type of long-term care you might require is unpredictable. It's challenging to earmark a precise amount for future costs, especially with long-term care costs steadily increasing.
  4. Market Timing: Your need for long-term care might coincide with a market downturn. This could mean your investments and assets are undervalued precisely when you need them most. Moreover, liquidating assets in a bear market to fund care could mean potential losses.
  5. Tax Implications: Withdrawing large sums from your 401(k) or selling assets could result in substantial tax liabilities, especially if those assets have appreciated considerably. Even losses can still be taxable gains.

Soaring Cost of Long-Term Care

Over the past decade, long-term care costs have skyrocketed, with no signs of slowing down. Costs are rising, whether in-home care, adult day care, assisted living, or nursing home care. 

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The median annual cost for in-home care (44-hour week average) is about $57,000 a year (about $4800 a month) in 2023. In 2048, 25 years later, based on increasing labor costs, that same amount of care will average about $111,000 a year -- over $9300 a month. Assisted living and nursing home costs are more expensive and are also growing. 

Why Long-Term Care Insurance is a Game-Changer

Given the pitfalls of self-funding and the ever-increasing costs, a smart alternative that offers both financial protection and peace of mind: Long-Term Care Insurance.

Watson says Long-Term Care Insurance is not a cure-all or magic elixir; more likely than not, everyone will do some degree of self-funding.

Long-Term Care Insurance is about shifting some of the risk off of yourself financially and onto another entity, in this case, an insurance company.

There are several benefits Long-Term Care Insurance can offer: 

  1. Guaranteed, Tax-Free Benefits: Long-Term Care Insurance ensures you receive the care you need without draining your income and assets. The benefits are tax-free, offering additional financial protection.
  2. Access to Quality Care: With an LTC insurance policy, you're not restricted in your care choices. Whether you prefer in-home care or a specialized facility, an LTC policy provides the flexibility to choose the best care available based on your needs and preferences.
  3. Inflation Protection: LTC insurance policies can include inflation protection, ensuring your benefits increase with the cost of care. This guarantee is crucial, considering the escalating expenses of long-term care services.
  4. Easing the Family Burden: It's not just about finances. Having an LTC insurance policy means your loved ones don't shoulder the stress and responsibilities of caregiving or making tough financial decisions during emotional times.

Watson says the reasons to have Long-Term Care Insurance are more than financial. 

An LTC policy, of any amount really, is a gift you give your loved ones. It reassures them that this was something you thought of, something you planned for. And, while there are some difficult decisions to be made regarding your care, you have put a plan in place to mitigate the physical, emotional, and financial burden they are likely to face as they guide you through long-term care.

Partnership Long-Term Care Insurance

Many financial advisors are unaware of the Long-Term Care Insurance Partnership program. A Partnership LTC policy allows you to shelter part of your estate even if you exhaust all your policy benefits. Even a small policy can provide you with substantial asset protection.

Watson emphasizes the importance of consulting an independent Long-Term Care Insurance specialist representing several top-tier insurance firms. 

She points out that seasoned specialists will be adept at understanding policy details and benefits, and crucially, they'll be familiar with the underwriting criteria of each insurer. An LTC specialist will also make appropriate policy design recommendations, giving you peace of mind. This ensures you get the most suitable coverage at the best price.

LTC Insurance – Affordable for Many

It's a common misconception that Long-Term Care Insurance is inherently expensive, deterring many from even considering it as a viable option for their future. The truth, however, is far from this belief. Policies are not one-size-fits-all but custom-designed to suit an individual's needs, preferences, and budget. Various coverage options and benefit periods are available, allowing potential policyholders to find a solution that fits within their financial means.

Moreover, LTC Insurance is a more economical choice when weighing the cost of a Long-Term Care Insurance premium against the potential out-of-pocket expenses for long-term care services. Premiums vary dramatically between insurance companies and are based on your age, gender, family history, and the options you select.

It's important to remember that while a monthly or annual premium might seem expensive, the cost of care without LTC Insurance can quickly drain income and assets in the future, adversely impacting your lifestyle and legacy. When viewed from this perspective, including a customized LTC policy can be both a smart and affordable strategy for many individuals.

Plus, policies exist that either return the premiums paid if you are lucky enough to never need care or provide a death benefit.

Avoid the Stress and Enjoy Your Future Retirement

A comfortable retirement, unburdened by the stress of unforeseen long-term care costs, is within reach. By understanding the risks of self-funding and considering Long-Term Care Insurance, you can ensure that your golden years shine as bright as you hoped, preserving your lifestyle and legacy. 

Remember, it's not just about preparing for the future but ensuring that the future is as golden as you've always dreamed. It is about having peace of mind, knowing your loved ones will always remain family and not have to be burdened with dealing with your future long-term care.

Most people add LTC Insurance in their 40s or 50s as part of their retirement plan.

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