This Retirement Health Care Expense Can Bankrupt Even Wealthy Clients

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.