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David Blanchett

Life Health > Long-Term Care Planning

This Retirement Health Care Expense Can Bankrupt Even Wealthy Clients

By John Manganaro

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What You Need to Know

  • The sky-high cost of nursing home care and the unaffordability of long-term care insurance mean even relatively wealthy clients are at risk of serious hardship.
  • While Medicaid is a long-term care payer of last resort, experts warn that using it could cause significant issues in retirement.
  • Early planning can help take some of the financial sting out of an otherwise costly experience.

Even a family that has done a great job saving for retirement can easily find itself in serious financial difficulty thanks to the sky-high costs of nursing home care, and according to David Blanchett at PGIM DC Solutions, there is currently no clear-cut solution to this major retirement challenge.

Idiosyncratic health risks that affect older couples with differing levels of overall physical health and anticipated longevity, Blanchett says, “are just something I’m not convinced there’s a great solution for” in the marketplace today.

While Medicaid is seen by many as a sort of long-term care insurance of last resort, unfortunately, this approach also comes with a serious pitfall. Namely, if there is a surviving spouse, the plan to rely on Medicaid to pay for extended and expensive care can imperil their remaining retirement years, given that Medicaid coverage generally comes with strict limits on assets and income.

Ultimately, Blanchett and other experts warn, advisors must help their clients see the tremendous risk posed by long-lasting illnesses such as Alzheimer’s disease and other forms of dementia. While an easy solution is not available, early and sober-minded planning can help take some of the financial sting out of an otherwise painful and costly experience.

A Million-Dollar Bill

Blanchett, a managing director and the head of retirement research for PGIM DC Solutions, recently posted on LinkedIn about this issue, responding to an article published last week in the Wall Street Journal.

The article shares the story of a family that had to stomach a long-term care bill that amounted to more than $1 million after the matriarch fell seriously ill but then, unexpectedly, continued to live for an extended period of time in a debilitated state. The cost of this care put tremendous financial strain on the family, jeopardizing the retirement security and shorter-term financial well-being of multiple generations.

Writing to ThinkAdvisor about the challenge, Blanchett says a similar scenario actually happened to his own mother’s parents. Blanchett’s grandfather entered a long-term care facility, and the cost of care quickly depleted their liquid savings. The couple ended up on Medicaid, but because Blanchett’s grandmother survived her husband by about a decade, she was left with very little wealth on which to rely.

“Luckily, she had support from other family members, in particular her brother,” Blanchett recalls. “But even a family who has done a great job saving for retirement could have this type of situation, where it’s the surviving spouse that would be the one significantly impacted.”

Another possibility is that the individual recovers, but then the family is effectively left destitute and unable to work because of the income limitations associated with their ongoing Medicaid coverage.

So, while it’s true that Medicaid is a long-term care payer of last resort, “using it could cause significant issues for families where there are survivors after the issue/event,” Blanchett warns.

The Cost of Care and Insurance

While the exact figure varies depending on the source cited, it is clear that the costs associated with extended care are painfully high in the United States — and growing. Some five years ago, for example, the average estimated cost of nursing home care was about $90,000 a year and much higher in New York and Hawaii.

In 2023, the average figure is now approaching $110,000 annually for nursing home expenses, according to data published by U.S. News & World Report, while care for a person with Alzheimer’s disease in a locked unit can come to more than $450,000 annually.

Given these eye-popping out-of-pocket price tags, in theory, long-term care insurance should be in hot demand, Blanchett says. In reality, though, relatively few people choose this route, even among the wealthy, and the reason is clear: a lack of affordable (and meaningful) coverage.

“Anyone who has followed the industry over the last decade knows there have been significant premium increases, and lots of people who want the coverage can’t get it,” Blanchett warns.

Medicare, Medicaid and Long-Term Care

As emphasized in a long-term care guide published on AARP’s website, many middle- and upper-income Americans mistakenly believe that Medicare can be relied on to cover the costs of long-term care.

“This is a common misconception,” AARP warns. “As a reminder, Medicare is strictly a health insurance program that covers costs related to illnesses and injuries (and, to some extent, their prevention).”

As such, Medicare will help pay for up to 100 days of rehabilitation or skilled nursing care after a major health issue, based on a doctor’s recommendation, but longer stays, such as a permanent move into a nursing home, are not covered. While some Medicare advantage plans offer nonmedical services at home, such as meals and installation of grab bars, coverage options can still be highly limited.

Medicaid, on the other hand, does pay for long-term nursing home care, but only for people with very low income and modest savings who can no longer handle basic daily tasks like bathing, toileting, dressing or feeding themselves.

According to AARP’s experts, a good rule of thumb is that if one has less than $750 in income per month and less than $2,000 in financial assets (not counting a home), they likely qualify for Medicaid.

“This can exclude a large number of people who draw Social Security, given that the average monthly benefit check is more than $1,600,” the guide warns. “Remember that Medicaid is meant to help just the very poor, although sometimes people use up their savings and spend so much of their income on care that they do become eligible.”

A Better Way?

Asked to reflect on what could help to improve this dire and worsening situation, Blanchett says a fundamentally different approach may be needed, though he admits that would be a heavy lift for industry leaders and policymakers.

“What I think we need is a better kind of public option,” Blanchett argues. “Someone could effectively elect (and pay for) coverage, which would ensure that in the event one spouse does have a health event earlier in retirement, the surviving spouse’s retirement after that wouldn’t be imperiled.”

As Blanchett explains, this is an especially challenging issue for married women.

“Using some loose math, they tend to be two years younger than their spouses on average, and they live, say, three years longer, or call it five additional potential years of planning,” Blanchett says. “Again, while certain social networks may come to the rescue (e.g., family) that’s not exactly what many older Americans want to rely on, and it could place significant burdens on children/surviving family members.”

Pictured: David Blanchett

John Manganaro

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