4 Ways Baby Boomers Can Prepare for Long-Term Care | American Funds

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AUGUST 17, 2017

4 Ways Baby Boomers Can Prepare for Long-Term Care

Long-term care costs could easily erode your savings. There are steps you can take now to protect your wealth and reduce stress for you and your loved ones.

The encouraging news is that Americans are living longer, with life expectancy well into the 80s. A 55-year-old woman, for instance, can expect to live to 87½. However, says Karen DeRose, president of DeRose Financial Planning Group, "The longer we live, the more likely we will one day need long-term care."

The U.S. Department of Health and Human Services predicts that one out of two Americans turning 65 will require long-term care services at some point in their lives. "You need to plan as if this will be you," adds DeRose. This article discusses some of the factors to consider when evaluating long-term care options. You should consult a legal and/or financial professional to determine an approach to address your needs.

Consider this: The average annual price of a private room in a nursing home is now more than $92,000, and the cost of round-the-clock home health aides tops $170,000 a year, according to long-term care insurance company Genworth’s latest Cost of Care Survey. And Medicare generally doesn’t cover these services.

The potential costs could be staggering, depleting even a sizable nest egg. So it’s important to get started before you might need help. The question is, should you buy insurance or simply save money toward covering future long-term care costs on your own?

Here are four options to consider.

1. Self-funding

With a target of at least $2 million in retirement savings, you could be able to "self-insure." Here’s how you can get started:

  • Create a plan: Think about how much you might need to cover potential long-term care costs. Working with a financial advisor and using an investment calculator can help you assess whether you’re on track to meet your goals.
  • Consider your investment mix: Separate long-term care funds from other retirement assets. If you don’t anticipate needing long-term care for some time, a relatively aggressive investment mix could make sense. "If we’re not touching this for 20 years, choose more aggressive investments such as equities," suggests Jamie Hopkins, co-director of the New York Life Center for Retirement Income at the American College of Financial Services. "As you get closer to 80, get more conservative."
  • Look into opening a Health Savings Account: If one is available to you, an HSA can be a good place to accumulate long-term care savings. The money goes into the account on a pre-tax basis, it compounds tax-free and withdrawals can be tax-free if used to cover your long-term care expenses. Learn more about health savings accounts at Capital Ideas.

2. Long-term Care Insurance

Long-term care insurance is often recommended for people who have less than $2 million in assets, but more than $300,000. (Those with less than $300,000 might be eligible for Medicaid, which covers long-term care for those with minimal assets and inadequate income of their own.)

This insurance can help pay for such future needs as assisted living or home health care. You can choose a policy that will reimburse you a predetermined amount of money for a period of time, generally two to five years.

You might consider buying a long-term care insurance policy when you're in your 40s or 50s, because premiums tend to increase as you get older. Put it off and you could be denied coverage completely due to your health.


  • Lowers your financial risk: Depending on your situation, benefits could cover some or all of your long-term care needs.
  • Reduces your taxable income: If you meet certain requirements, you can deduct long-term care premiums from your taxable income.


  • Coverage can be expensive: A 55-year-old might pay $2,000 a year for a policy that offers a daily benefit of $150 for three years. However, costs vary widely depending on factors such as age, gender, health and type of benefits.
  • You keep paying: You pay the premiums for life or forfeit the benefits.
  • Premiums could increase: "The company can raise the premium with the approval of insurance regulators, perhaps when you are vulnerable and can’t afford it," says Hans Scheil, a certified financial planner, CEO of Cardinal Retirement Planning, and author of The Complete Cardinal Guide to Planning for and Living in Retirement.
  • Use or lose: If you never need to use your policy, the money you paid in premiums is gone. Peace of mind comes at a price.

3. Hybrid Policies

Hybrids offer long-term care benefits in combination with life insurance or an annuity. If you were to need long-term care at some point in your life, the policy would cover it. However, if you were to die the policy would pay a death benefit, or the value of the annuity, to your beneficiaries.

"Unlike traditional long-term care policies, these are not ‘use it or lose it,'" emphasizes DeRose.


  • No rate hikes: Hybrid policies are often funded with a single lump sum premium or with a guaranteed set of premiums for a finite period of time. Policyholders are generally protected from future premium hikes.
  • Easier to qualify: You’re providing the premium upfront, so it’s generally easier to qualify for hybrid policies.
  • "The insurance company is using your money first to pay you back, which means less risk on their part," explains Scheil.


  • Big investment: Because you pay premiums upfront, you have to be willing to make a sizable investment, in some cases as much as $200,000.
  • Tying up money: You’re unable to invest your money elsewhere to pursue returns greater than the modest fixed interest rate of perhaps 2%. If interest rates rise, the rates paid by the policy would look less attractive compared to other types of investments.

4. Talk to an Elder Law Attorney About Medicaid Planning

Medicaid generally covers long-term care costs only after you’ve exhausted most of your savings. With proper planning, you could preserve some of your assets for your spouse and your heirs but still qualify for Medicaid coverage.

Assets can be placed in a Medicaid trust and protected for five years.

Some things to keep in mind:

  • Irrevocable: A Medicaid trust can’t be changed or revoked. Once it has been set up, you are only entitled to income from the trust.
  • Could delay Medicaid: If you transfer the assets less than five years before applying for Medicaid, your coverage could be withheld, so you should start thinking about Medicaid planning well ahead of when you might need it. "Ideally, you want to start thinking about this around age 60," says Melissa Negrin-Wiener, a partner at the law firm Genser Dubow Genser & Cona. “You want five years to come and go without complications."

You've worked too hard to build that retirement nest egg, only to see it wiped out by unforeseen health costs.

While it might be difficult to think about a time when you might need help caring for yourself, having a plan could lower the financial and emotional stress for you and your family.

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Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. This information is intended to highlight issues and not to be comprehensive or to provide advice.