He Spent $500,000 on Long-Term Care for His Wife. How You Can Prepare for the Costs.

Lou Torres had known for years that his wife, Carol, had dementia and might end up in long-term care. So he increased their savings rate as he gradually became Carol’s 24-hour caregiver.

“I didn’t know what was coming, but I knew it would be expensive,” he said.

In 2020, the task of taking care of his wife became too much for Lou, and he placed Carol in a memory care center near where he lives in Waxhaw, N.C. It wasn’t cheap. By the time she died last year, the couple had spent nearly $500,000 on her care.

It was a brutally painful period for Lou. Carol didn’t recognize him for the final years of her life. But financially, he was prepared.

Between his savings and a rising stock market, Lou, now 73 years old, was able to pay for Carol’s care without badly denting his $2.5 million nest egg.

“I’m satisfied with how it worked out, considering I didn’t have long-term care insurance,” he said.

Only about 11% of Americans have private long-term care insurance, according to KKF. People with limited net worth and income can get no-frills long-term care paid by Medicaid. The rest of us must hope we will remain lucid and in good health, or be prepared to lay out hundreds of thousands of dollars as the Torres family did.

Ann Reilley, Lou’s financial advisor, typically advises couples planning to self-fund care to set aside around $500,000 to cover costs for both of them. Memory care facilities are particularly expensive, and Torres ended up spending that much just on his wife’s care.

If you are still pondering how to finance long-term care, here are some things to keep in mind.

Medicare Doesn’t Pay for Long-Term Care

Medicare only pays for a maximum of 100 days in a skilled nursing center. You have to meet prerequisites to be admitted and stay there and there are copays of $204 a day after the first 20 days for people in original Medicare. Those on Medicare Advantage plans may have additional copays, according to the government.

Some middle-income couples place assets in trusts to qualify for Medicaid-paid long-term care. But you generally have to shed assets at least five years in advance, or Medicaid officials may attempt to claw it back to pay for care.

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Beyond that, Medicaid pays for basic long-term care in a no-frills nursing home. It may not be the level of care you want for yourself or a loved one. And there are often long waits to get into a nursing center that accepts Medicaid, according to Melinda Caughill, a private Medicare advisor for retirees.

Insurance Is Getting More Expensive

When long-term care insurance hit the market in the 1970s, insurance companies misjudged the costs of long-term care, underpriced the policies, and ended up taking big losses.

The insurance is now both more expensive and more limited in what it covers. Whereas some early policies provided lifetime coverage, a policy now will typically cover three to five years with a cap on how much it will pay out. After that, you are on your own again.

The higher price of insurance has made self-funding more attractive. Financial planner Richard Faw of Savannah, Ga., who is also a chartered financial analyst, said when he runs the numbers on new long-term care policies, most people are better off investing the money they would spend on insurance premiums and self-funding long-term care.

“Most of our clients do self-fund,” he said. “But the challenge of self-funding is you have to remain disciplined over many decades for an expense you may not have.”

How Aggressively You Invest Depends on Your Age

If you start saving in your early 50s and don’t expect to incur any long-term care expenses for many years, you should be aggressive and put your investments in stocks, said financial advisor Michael Landsberg of Punta Gorda, Fla. “If it’s a decade or two in front of you, you need to find assets that have that duration. At the very least, you need equity exposure to keep pace with the expenses you’re seeing in the world of long-term care.”

If, on the other hand, you’re 75 years old, you want to have your investments in ultrasafe securities and set aside to cover long-term care.

Don’t Forget the Tax Consequences

You may have plenty of money in your 401(k), but pulling it out in big chunks to fund long-term care will push you into higher brackets for taxes and for Medicare premiums. If possible, avoid the tax hit by paying for long-term care out of after-tax funds like a brokerage account or a tax-free Roth account.

Even If You Have Insurance, You May End Up Spending Heavily

Insurance doesn’t typically kick in until you have been picking up the tab for three to six months. In addition, many insurers are boosting premiums for long-term care insurance. Here is a Barron’s article about a couple who face a 143% increase in their premium.

Richard and Meredith Martin of Surf City, N.C., both had parents that ended up in long-term care. So the couple bought long-term care insurance in 2008 when they were both in their late 40s and long-term care insurance was cheaper. Because they started so young, between the two of them, they pay only about $2,000 a year in premiums. But in lieu of boosting their premiums, their insurer has been slashing the amount of long-term costs it will cover.

Richard, now 65 and a retired Navy pilot, views the insurance as supplemental and figures the couple will pay the bulk of long-term costs out of savings. “We’ve been lucky and we’ve invested well,” he said.

Costs Depend on Where You Live and Other Particulars

Whereas the rough rule of thumb for long-term healthcare costs is $250,000 per person, that can vary considerably from place to place. Certain urban areas are more expensive and rural areas tend to be cheaper. Here is a cost of care survey from Genworth that tells you the average costs in your area.

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If you come from a family where dementia is heavily prevalent, you need to save even more. Memory care centers that specialize in Alzheimer’s patients are much more costly.

Your House Can Be a Giant Piggy Bank

After the huge run-up in residential real estate prices since 2010, many homeowners have hundreds of thousands in untapped equity. If one spouse goes into long-term care, the other spouse can pay for the care by downsizing to a smaller home or remaining in the same house and taking out a reverse mortgage.

Not surprisingly, people in long-term care stop spending on travel and on dining out. Even the healthy spouse tends to spend far less. This drop in spending can help offset some of the cost of long-term care.

Mark Fonville, a Richmond, Va., financial advisor whose clients include the Martins, said when it comes to long-term care, his clients “typically are funding that out of their portfolio because other expenses have started to decline.”

Financial advisor Josh Trubow in the Boston area echoed this: “They’re not paying for meals, they’re not buying clothes, they’re not going on trips. And if they sell their house, they have all the home equity that was in their house” to finance expenses.

Write to Neal Templin at neal.templin@barrons.com