Rising Long-Term Care Costs

By Chris Duderstadt

May 1, 2023

Rising Long-Term Care Costs

Key Points – Rising Long-Term Care Costs

  • The Three Stages of Your Retirement – Your Go-Go, Slow-Go, and No-Go Years
  • How Rising Long-Term Care Costs Can Impact Your Retirement
  • Planning Around Rising Long-Term Care Costs
  • Long-Term Care Isn’t Just About the Person Receiving Long-Term Care
  • 12 Minutes to Read | 24 Minutes to Watch

Rising Long-Term Care Costs

We’re probably all in agreement that it would be nice to stay young forever, but all know that isn’t the case. That’s a big part of why we’re so passionate about giving you freedom from financial stress in retirement so that you can spend as much time as possible doing the things you love at Modern Wealth Management.

Retirement for most people will have three stages: your go-go, slow-go, and no-go years. When we’re building a financial plan, we typically try to front load someone’s spending in retirement so they can do the things you love doing in retirement during your go-go years. But as we alluded to, we can’t stay young forever. We want you to prepare you for your slow-go and no-go years of retirement as well.

There’s a possibility that part of your no-go years could be spent in a long-term care facility. Many of you likely know someone who is in a long-term care facility right now and have noticed the rising long-term care costs. Logan DeGraeve and Matt Kasper are going to take a deep dive into those rising long-term care costs and how to plan for them on the Modern Wealth Management Educational Series.

What Do You Need to Be Thinking About When It Comes to Rising Long-Term Care Costs?

Most people are aware of rising long-term care costs, but oftentimes struggle with how to plan for them. It’s an extremely hard issue to come to terms with and is far from easy to plan for. Part of why long-term care has been so difficult to plan for in the past year or so is because of something that’s caused a lot of people some pain. That’s inflation.

“This huge inflation that we’ve had is not customary to what we had been experiencing for the past 10 to 15 years. When you think about an inflation factors, we’re building those assumptions into people’s plans. We’re trying to be as conservative and realistic about that pressure as possible. We’re not just thinking about the impact people are feeling from inflation at the grocery store and gas station. We’re also thinking about inflation’s impact on something that’s already excessive in cost.”  – Matt Kasper

Well, long-term care is one of those things that’s already excessive in cost. And it hasn’t been going up by 3-5% like we’d usually be accustomed to. In 2022, we had an event where long-term care costs went up by 14%. That’s why we apply a higher inflation factor for things like health care costs in someone’s financial plan than we do for consumer goods so that a sudden spike won’t derail the plan.

“It’s important to break out what you’re spending. While the basket of goods at the grocery store has inflated like crazy lately, history tells us that long-term care, health care costs, and college expenses are going to inflate substantially more.” – Logan DeGraeve

These Inflationary Levels Aren’t the Norm

With this increased pressure or rising long-term care costs, it is important to remember that this level of pressure isn’t likely to happen year over year. Last year was uncommon with how much inflationary pressure we were experiencing. At the same time, it’s a reality of what we were up against for that calendar year.

As Matt was reviewing a client’s plan earlier this year, that reality became very apparent to him. How does this increased pressure impact the plan? First, Matt had to enhance the spending that was understated because there needed to be more pressure applied. Second, he needed to determine an appropriate amount of inflation to apply to the excessive rising long-term care costs.

“When we went through that, we had to ask, ‘Does their money last or are they in a position where they’re possibly spending down all their wealth?’ Then, we were going to rely on the Medicaid system. When you think about your parents and grandparents, we’re trying to protect them against a Medicaid type of system. What typically happens if you drain your assets or wealth is that you end up relying on your loved ones to be caregivers and for financial support to get through the rest of your life.” – Matt Kasper

The Importance of Long-Term Care Planning

There’s another issue with rising long-term care costs that Matt alluded to. When someone is going through or planning for the possibility of a long-term care stay, they don’t want to be a burden to their loved ones. That highlights the importance of long-term care planning. If you haven’t done any long-term care planning, where do you start?

“You start by having a comprehensive financial plan. You can’t stress test long-term care planning without having an initial plan completed. It’s important to know where you’re at before a possible long-term care stay.” – Logan DeGraeve

Questions to Ask About Long-Term Care and the Impact of Its Rising Costs

That doesn’t mean you need to buy long-term care insurance as soon as possible. That’s not what Logan is saying. What does need to happen is for you to have a conversation about what will happen if you or your spouse needs long-term care. What’s the plan? Can the spouse that’s in good health provide adequate care? Do you need in-home care? Do you need to seek out a facility that provides long-term care? And what are the costs associated with each of those options? Then, you stress test your plan.

“Not to sound morbid, but long-term care is one of those things where you go in and you don’t come out. It’s not like rehab on your hip or something like that. The average stay is about three years depending on what data you want to look at. But what if your spouse has a seven-or eight-year stay because of a cognitive impairment? We can always speculate worst-case scenarios? Is it possible? Sure. But you don’t want to make every decision in your plan based on those worst-case long-term care scenarios either.” – Logan DeGraeve

Again, this article about rising long-term care costs isn’t meant to scare tactic to drive people into buying unnecessary insurance. But the reality is that long-term care is something that affects seven out of 10 people. With the odds of facing a long-term care stay at some point being so high, you need to have a plan in place.

How Much Does Medicare Help with Rising Long-Term Care Costs?

If you don’t have the self-funding capabilities, you can’t assume that Medicare is going to fully cover this cost. It really only covers a small amount at the beginning stages of long-term care. When you get beyond that point of Medicare and you’re relying on your assets and wealth, do you have enough to comfortably cover the long-term care stay?

“I’ve heard multiple clients say that if they’re in a nursing home, they no longer need their home. They say that they’re going to sell their home and that equity will be how they self fund and that they don’t need insurance to cover the rising costs of long-term care. But that isn’t necessarily going to be the most efficient way to cover that risk.” – Matt Kasper

Maybe one spouse is nearing the situation where they may need care and they do decide to sell their home. They’re likely looking at downsizing and think that they might get $200,000-$300,000 of equity from that. Well, that might have been a reasonable expectation in the past. But with the environment we’re in right now with home prices, it isn’t reasonable.

The Impact on the Surviving Spouse

Everyone needs to realize that a long-term care stay doesn’t just impact the spouse who needs long-term care. If anything, it impacts the other spouse even more, and a large part of that is because of the rising costs of long-term care. What kind of lifestyle will that spouse be able to carry on with after those assets are depleted?

“I have that conversation with all my clients. Maybe you have three to four main spending goals. It could be your basic living expenses, which won’t go away a lot. You could have traveling as one of them, but it will probably go away soon or be greatly reduced. Home improvements could be one of those goals if you’re downsizing. You can stress test the financial plan and add in like $80,000 a year for long-term care in addition to what you’re spending. That probably isn’t quite realistic because some of those expenses will go down. But what you can’t do is assume they’ll suddenly get cut in half. Also, everyone’s situation will be different.” – Logan DeGraeve

Without having a financial plan, how are you supposed to know where your wealth will be in 25-30 years? You’re likely going to need that wealth to cover excessive costs. That’s why planning is so critical. That’s where the stress testing is done to let you know if you and your spouse can withstand those excessive costs. Can you protect your  in that process?

Thinking Long-Term with Rising Long-Term Care Costs

Let’s take a step back and really think about long-term wealth and long-term planning. When Logan’s clients are in their 60s, something he always discusses with them is Roth conversions. Logan says it’s critical to talk about Roth conversions at that stage for two reasons.

“One, if we do need to take money out at 80-85 years old for a large sum, it’s not all taxed. If you start thinking about your income at 80, you’ll have Social Security, maybe pensions. You probably have Required Minimum Distributions if you have a bunch of IRA money. Now you’re probably like, ‘Oh my goodness. I’m in the 24%, which will soon be the 28% tax bracket.’ And number two, your Roth bucket is a great vehicle to invest more aggressively long-term. If you need that money 10, 15, 20 years from now, it’s there.” – Logan DeGraeve

Being Tax Efficient

You sometimes might need to take more risks than necessary because you think you need to grow your money to protect for these rising long-term care costs. But what happens if you have a portion of your money that you know grows tax-free that would be available for those costs down the road? And if you’re one of the lucky three of 10 people who won’t need long-term care, that’s tax-free money you’re leaving behind to your loved ones. That’s a key part to building a tax-efficient portfolio.

If you have a loved one who is in long-term care right now and are taking on the brunt of those expenses, you need to be working with a CPA, a tax professional. The deductibility of those rising long-term care costs may surprise you. Utilizing an IRA could be an efficient way to fund those costs.

“That’s what we as CFP® Professionals rely so heavily on with our tax team is making sure that if our clients take on these expenses that they’re doing so in a tax-efficient manner.” – Matt Kasper

Estate Planning and Long-Term Care

That leads us right into discussing estate planning. Everyone needs health care directives and powers of attorney. Not everyone needs a trust since it depends on their situation, but they’re not just for the ultra wealthy. But rising long-term care costs is an estate planning conversation too.

“If you do have someone who goes into long-term care or has a cognitive impairment, you need to have those documents in order. Just because someone has a cognitive impairment or is in long-term care for three or four years doesn’t always mean that they’ll pass away before their spouse.” – Logan DeGraeve

Then, there’s legacy planning as far as what you want to leave behind. If you start stress testing your plan, you might see that you can self-insure. That would be great because you wouldn’t need any level of insurance. But instead of leaving $2 million behind, maybe you leave closer to $1 million behind.

Life Insurance and Estate Planning

Would that be something that you’re OK with? Some people are, some people aren’t. But it needs to be part of the conversation. What do you do in that circumstance? You could get a long-term care policy. Another advanced technique to consider in that scenario is using life insurance.

“Think about those hybrid or linked insurance policies. We’re all familiar with life insurance where you’re ultimately paying a premium and receive a death benefit. But what about a linked policy that allows you to access some of that death benefit for long-term care costs? This can be a great way to leverage and protect some of your wealth. It can be a more efficient way to protect your wealth as well. If that’s a priority for you, let’s design something that’s going to leave a meaningful legacy and not have it all spent at a nursing home.” – Matt Kasper

Making the Best of a Bad Situation

These are obviously all tough conversations because when you see a loved one going through a long-term care stay, especially one that involves cognitive impairment. It’s draining on the family as well. What that experience can do is make the next generation say that they never want their kids to be in the same situation. Obviously, though, there’s only so much you can control with your health, but a plan can significantly help with making the best of a bad situation.

After seeing their parents spend down their assets, a client couple of Logan’s explained to him how important it was to them to leave a legacy behind to their two children. They wanted to leave a minimum of $2 million behind.

Second-to Die and First-to-Die Policies

Once Logan was informed about his clients’ desire, he suggested that they go with a second-to-die policy. So, when both of them pass away, there’s a $2 million insurance policy. Each of their kids would get $1 million and it’s tax-free.

“We’re not saying that insurance and life insurance always makes sense for everyone’s situation. It depends on your specific goals and what you’re trying to do.” – Logan DeGraeve

We always want to share something that Dean Barber has done with some of his clients. If one spouse is in the early stages of cognitive decline and the other spouse is healthy that the healthy spouse, there’s a concern that they could spend down their assets and not leave enough for the healthy spouse to achieve their goals. Well, you can still do the same sort of thing with a first-to-die policy. That’s when one spouse passes away and money goes to the surviving spouse to replenish their portfolio.

“These can be great strategies. Folks need to walk through them and understand the pros and cons of them and how this can impact their life, but their loved ones. When you really consider long-term care, the one reality—whether it’s emotional, financial, or giving up time and effort—is that it impacts 100% of the people going through it. It’s not just the people in the nursing home. It’s the spouses, family members, and other loved ones.” – Matt Kasper

These Are Tough, But Crucial Conversations

Logan’s grandmother had a cognitive impairment and one of the things that he immediately realized was the toll it took on his mother. His grandma’s experienced helped him realize that the emotional component is challenging enough for a family to deal with. Adding in the financial component of rising long-term care costs can make it even more difficult.

“One of the biggest pet peeves that I have within our industry is that a lot of financial or investment advisors aren’t willing to have these conversations. A husband and wife don’t want to have these conversations.” – Logan DeGraeve

Matt has a personal story to share about his family going through a long-term care situation as well. His aunt took care of his grandmother for several years.

“I don’t think she would’ve traded that role for anything. But at the same time, she was spending all her time making sure my grandma was in great shape. My grandma passed away last year, but she always said that there’s a special place in heaven for my aunt—her daughter—for the remarkable care provided her.” – Matt Kasper

Having Those Conversations Before It Starts to Get Too Late

While no one wants to have those conversations, hopefully we’ve helped highlight why it’s important that they take place. It’s critical to have a plan in place, especially with having to deal with rising long-term care costs.

“You need to have those conversations in advance. Let’s say that you do the planning and you have more than enough money. You might not be worried about rising long-term care costs. But you still need to have the conversation of what you want to happen if care is needed. I have some clients don’t want their kids or their spouse to take care of them. They want them to live their life because it’s a full-time job to provide long-term care. You need to have those conversations when everyone is in a clear mind with what is going on. When those conversations start happening after the fact, it’s more difficult.” – Logan DeGraeve

How Do You Start Those Conversations?

We’ve said it before and we’ll say it again that it all starts with a financial plan. If you don’t have a financial plan, we have a few ways to get that process started for you. We want you to see how rising long-term care costs could personally impact you through our industry-leading financial planning tool. It allows you to do that stress testing we mentioned earlier so you can see your probability of success in retirement if you were impacted by something such as a long-term care stay. You can use our tool at no cost or obligation by clicking the “Start Planning” button below.

Start Planning

Working with a CFP® Professional

And we want to mention one more time about the importance of having those tough conversations sooner rather than later. You need to have those conversations with a CFP® Professional that puts your needs before theirs. We take that fiduciary standard very seriously at Modern Wealth Management, especially when it comes to things like ensuring that people have clarity and confidence about the financial component of a long-term care stay.

In our first conversation with you, we won’t even focus on your financial situation. We’ll want to talk about your goals for retirement and maybe begin to touch on some of those estate planning-related topics that we discussed earlier. To build the plan that’s best for you, we need to know what’s important to you.

It should become very apparent to you that we’re committed to giving you confidence that you’re doing the right things with your money, freedom from financial stress, and time to spend doing the things you love. To start a conversation with one of our CFP® Professionals about your retirement goals—whether they’re related to long-term care or whatever it may be—click the “See Our Schedule” button below.

See Our Schedule

We want you to be as comfortable as possible when discussing uncomfortable issues such as rising long-term care costs. So, we’re flexible on the setting of the meeting that you schedule with one of our CFP® Professionals. It can ben in person, virtually, or by phone depending on what works best for you.

Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.

The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.