Long Term Care Deep Dive — Part 2: A Funding Roadmap
Paying for Care Without Derailing Retirement
In Part 1, we explored the likelihood of needing long-term care and the ripple effects on spouses and caregivers. The next logical question is financial:
If care is needed, how is it actually paid for?
The answer surprises many families. Long-term care in the United States is not funded by a single system. Instead, it relies on a combination of personal savings, limited Medicare benefits, means-tested Medicaid support, and — in some cases — private insurance. Each source plays a role. Each has limits.
Understanding those limits before a crisis occurs is what separates reactive decisions from intentional planning.
A Realistic Scenario: When Care Consumes Savings
Consider a retired couple with $900,000 in investable assets, Social Security income, and a paid-off home. Their retirement plan assumes modest portfolio withdrawals to supplement income.
At age 78, one spouse develops advanced cognitive decline and requires nursing home care costing approximately $100,000 per year — consistent with national averages reported by industry and research sources.
If care lasts four years, total direct costs could exceed $400,000. Portfolio withdrawals accelerate. Investment growth slows due to asset liquidation. The healthy spouse’s long-term income sustainability becomes more fragile.
This is not an extreme scenario.
The question is not whether care is expensive. It is how that expense is absorbed — and by whom.
A Funding Map: Three Primary Sources
Long-term care is typically financed in one of three ways:
- Personal savings and assets
- Government programs
- Private long-term care insurance
Most families use some combination — whether intentionally or by default.
1. Personal Savings and Assets
For many households, the first source of funding for long-term care is personal savings — retirement accounts, brokerage assets, cash reserves, and often home equity. This approach offers the greatest flexibility. There are no eligibility tests, no benefit caps, and no restrictions on care setting. Families can choose home care, assisted living, memory care, or skilled nursing facilities based on preference and need rather than program requirements.
The trade-off is exposure. A multi-year care event can significantly accelerate portfolio withdrawals. What begins as a retirement income strategy can quickly shift into an asset preservation challenge, particularly for the surviving spouse. Self-funding may work well for households with substantial surplus assets. For others, it introduces concentration risk — one health event materially reshaping a lifetime financial plan.
Home equity often represents the largest untapped asset on the family balance sheet. Downsizing, selling the home, or moving into a continuing care community can free up meaningful capital. But these decisions must be evaluated carefully when only one spouse requires care. If one partner enters a facility while the other remains at home, selling the residence may undermine housing stability at precisely the moment it is most needed.
A reverse mortgage may provide an alternative. A Home Equity Conversion Mortgage (HECM), insured by the FHA, allows homeowners age 62 or older to convert home equity into cash while retaining the right to live in the property. Funds may be accessed as a lump sum, line of credit, or monthly payments. For couples, this can create liquidity to support in-home care while allowing the healthy spouse to remain in the home. However, reverse mortgages reduce remaining equity over time, loan balances grow, and repayment is generally required when the home is sold or no longer the primary residence. Estate planning goals and long-term housing needs must be weighed carefully.
Another structured approach sometimes considered is a Qualified Longevity Annuity Contract (QLAC). A QLAC allows individuals to allocate a portion of qualified retirement assets into a deferred income annuity that begins paying at an advanced age — currently as late as age 85 under SECURE 2.0 rules. Because QLAC assets are excluded from Required Minimum Distribution calculations until payouts begin, they can help manage longevity risk and establish a future income floor. While a QLAC is not long-term care insurance, it can provide dependable late-life income that helps offset extended care expenses, particularly if one spouse lives significantly longer than expected. The trade-off is reduced liquidity during earlier retirement years.
Each of these strategies must be evaluated through the lens of spousal protection. When only one spouse needs care, the planning question often shifts from “How do we pay for care?” to “How do we preserve stability for the healthy spouse?” Housing continuity, income reliability, and long-term asset preservation become central considerations.
No single approach is universally appropriate. The right path depends on the couple’s asset structure, income profile, health history, and legacy priorities — and ideally, is evaluated well before a health event forces the decision.
2. Government Programs: Medicare and Medicaid
Medicare provides only limited, short-term skilled care coverage. To qualify for nursing facility coverage, an individual must have a qualifying hospital stay and require skilled care ordered by a physician. Even then, coverage is capped at 100 days per benefit period, and Medicare does not cover custodial care — assistance with bathing, dressing, eating, or supervision for dementia.
Because most long-term care needs are custodial in nature, Medicare functions as short-term post-acute coverage, not long-term financing.
Medicaid, by contrast, is the largest payer of nursing home care in the United States. However, it is a means-tested program. Eligibility requires meeting strict income and asset limits, and transfers for less than fair market value within the 60-month look-back period can result in periods of ineligibility.
While certain assets — including a primary residence under specific circumstances — may be exempt for eligibility purposes, states are generally required to pursue estate recovery after death.
For many middle-income households, Medicaid becomes relevant only after significant asset spend-down. That reality often surprises families who assumed government programs would provide broader support.
3. Private Long-Term Care Insurance
Private long-term care insurance is designed to share the financial risk of extended care. Policies typically provide a daily or monthly benefit for skilled, intermediate, or custodial care — whether delivered at home or in a facility.
Unlike Medicare, these policies cover custodial care, which represents the majority of long-term care needs. Coverage terms vary by policy, including benefit amounts, elimination periods, and duration of benefits.
Insurance does not eliminate cost exposure. Instead, it transfers part of the risk to an insurer. For some households, it functions as catastrophic protection. For others, it preserves portfolio longevity and protects the healthy spouse’s income plan.
We will examine policy design and decision frameworks in detail in Part 3.
Why Medicaid Planning Often Enters the Conversation
Long-term care funding frequently becomes a discussion about thresholds.
How much can be self-funded without jeopardizing retirement income? At what point does asset depletion risk become uncomfortable? What protections exist for the healthy spouse?
Because Medicaid eligibility rules are strict and subject to a 60-month look-back period, planning must occur well before care is needed. Waiting until a health crisis often limits options and accelerates spend-down.
For families who never expected to consider Medicaid, understanding the rules early allows for more thoughtful coordination between retirement income planning and estate planning goals.
The Bigger Planning Question
Long-term care funding is not about predicting exactly what will happen. It is about deciding — in advance — how much risk to carry and how much to transfer.
Some families will self-fund comfortably. Some will rely on Medicaid after assets are exhausted. Others will combine personal assets, insurance coverage, and strategic planning to preserve flexibility.
The goal is clarity — not fear.
In Part 3, we will take a deeper look at private long-term care coverage: how policies are structured, how inflation protection works, and how to evaluate whether transferring part of this risk makes sense within your broader retirement and estate plan.
