Long-Term Care: The Most Overlooked Decision in Retirement Planning


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When meeting with clients and preparing financial plans, long-term care, or “facing incapacity,” is by far the most difficult subject to bring up. Clients seem to have little difficulty facing their own mortality and preparing to provide for survivors after they are gone. Bring up long-term care, including the possibility of needing help with daily activities and care due to memory loss, and the client conversation gets shut down quickly. Long-term care, provided either at home or in a facility, can cost $30,000 to $100,000 a year or more. Many clients are in denial of this reality. As Certified Financial Planning™ professionals, we view it as our job to confront the tough facts when a client hires us to prepare a retirement plan. The basic subject areas a person needs to address when planning for retirement are Social Security, Medicare, long-term care, IRAs, investments, life insurance, and taxes past the age of 62. While each of these is singularly important in crafting a sufficient retirement plan, they all play a crucial role when strategizing your specific plan for long-term care coverage. Focusing on the long-term care implications of each planning subject will help illuminate the importance of having a complete retirement plan to save you and your family from the complications, panic, and pain that can come with aging.

A Social Security check is enjoyed by most retirees in the United States, and can become the base of many retirees’ income. The main financial planning decision surrounding Social Security is when to start collecting. As early as 62 or as late as 70? Does one collect from his or her own record or file on their spouse’s record? What happens to the Social Security checks when the first of a couple dies? These are just a few of the questions a financial planner can answer for you. Social Security is the first place your caregivers go to pay the long-term care bill when there is no long-term care insurance. While this is acceptable if you have planned for it with a written financial plan for self-insurance, if that is not the case, losing a Social Security check can be very damaging for you and your family. If long-term care insurance is not the path you want to take, make sure the way you plan to pay for long-term care is in order.

Medicare is the health insurance program for retirees age 65+. To simplify the Medicare puzzle a bit, here are the basics: Original Medicare is made of Part A and Part B. Supplemental coverage can be paired with this to eliminate any gaps in coverage. Part C is not Original Medicare and is most commonly called Medicare Advantage. Part D, typically paired with Original Medicare, provides coverage for prescription medications. A big misunderstanding about Medicare and supplemental insurance is that it pays for long-term care; it doesn’t! Don’t fall victim to this common misconception…plan for long-term care in advance to make sure you are not caught without any coverage or a plan.

A significant amount of the average retirees’ savings is held in IRA accounts. Income taxes have to be paid when this money is withdrawn, unless it is a Roth IRA. Some basic tips regarding your IRA include: transfer money only from custodian to custodian, update beneficiary forms regularly, plan for required minimum distributions beginning at age 70 1/2, and consider paying the taxes now on a Roth conversion, which allows for tax-free income later. IRAs are the second place your caretakers usually go for money to pay the long-term care bill, after your Social Security check. IRA withdrawals are taxable as ordinary income, and the long-term care bill creates a corresponding tax deduction as a medical expense. Smart planning is needed in order to optimize using your IRA for long-term care coverage if you are planning on self-insuring long-term care. One mistake with an IRA can cause big tax liabilities and possible penalties.

Retirees are generally more focused on creating income than they are on growing their investments. A risk profile assessment followed by a corresponding asset allocation will set a retiree on the right course. Though it is impossible to avoid all risks, finding a CFP® professional who can help invest your money as a fiduciary can minimize unnecessary risks. Long-term care services, paid for by you, will create a big dent in your savings and income. Many fixed indexed annuities have long term enhancement benefits and don’t require you to answer health history questions. The need for long-term care funds could come at the wrong time relative to the ebb and flow of the markets, so buying these enhancements could be a good choice. While a fixed index annuity does have its downsides, such as your money being tied up for a long period of time and high fees, if purchased by the right person for the right reasons, the return of being protected from events such as market loss, outliving your savings, and not having long-term care protection is much greater than the losses.


When a person dies, the survivors need money, most likely for last expenses or income replacement of a Social Security check for a spouse. Life insurance can be the answer. If you already have life insurance, make sure to keep your beneficiary designations up to date and check older cash value policies to guarantee they will stay in force for the rest of your life. As mentioned earlier, self-insurance is one option for long-term care planning. Another is hybrid long-term care insurance. Hybrid long-term care insurance is the use of life insurance that allows a retiree to use the death benefit of a life insurance policy to pay for long-term care if needed. One complaint that many people have about traditional long-term care insurance is that if long-term care is never needed the premium money paid is wasted. Hybrid long-term care insurance solves this. While you are making sure you are protected from the monetary loss long-term care can cause, you are also protected from the monetary loss dying can bring to your family. Make sure to bring up this option with whoever is helping you plan your retirement to see if it could be a good fit for your situation.

There are lots of income taxes in retirement: Social Security is partially taxed, Medicare Part B and Part D surcharges are a hidden tax, and there are income taxes even in death.  Long-term care costs can be a tax deductible medical expense and the premiums paid for long-term care insurance can have tax advantages. The IRS considers tax-qualified long-term care premiums a medical expense. All your medical expenses have to exceed 10% of your adjusted gross income to qualify for the tax deductions. There is a limit though on how large a premium can be deducted depending on the age of the taxpayer. For example, in 2016, if you were between 41 and 50 years old, the maximum deduction for the year was $730. As you can see, this can get complicated. Make sure to discuss this with your retirement planner, CPA, or any other financial professional to make sure you are not losing out on this opportunity to save money.

Social Security, Medicare, IRAs, investments, life insurance, and taxes all affect how you plan for long-term care. Long-term care planning is very important. According to the U.S Department of Health and Human Services, someone turning age 65 today has an almost 70% chance of needing some type of long-term care. Unless you specifically plan for it, it can be a huge, possibly insuperable, challenge not only for you but for your loved ones as well. Start planning for long-term care now to avoid the stress and pain in the future; you’ll be glad you did.

Hans Scheil is the author of “The Complete Cardinal Guide to Planning for and Living in Retirement” and the accompanying workbook. He can be reached at Hans@CardinalGuide.com.

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