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Long-Term Care Costs: Significant Enough to Worry About?

  • Oct 24, 2012
  • Meaghan Puglisi
  • 3-min Read

From the Lifesprk long-term care insurance blog series

Most people don’t consider the full cost of a long-term care event. In previous posts, we’ve shown how costs for an average 5 year long-term care event range from $200,000 to $450,000. The probability of an 80 year old collecting benefits under a long-term care insurance policy for at least a year is 50% and there’s a 20% probability of collecting for 5 years.


That already sounds pretty awful, right?? It’s actually much worse because the full cost of the long-term care event will likely include the costs of a tax burden and lost income as you spend retirement savings. Let me explain…

Taxes always have to be paid

When you put money in a 401 [k] or tax sheltered annuity you haven’t paid taxes on it yet. This means that when you pull money out, it will be subject to tax. With federal and state taxes, your combined tax burden could be anywhere from 30% and 50%. Let’s be conservative and assume you’re in a 30% combined tax bracket and that your money has been earning a 3% return. If you had a 2 year long-term care event where the care cost $100,000 and you took it out of your 401 [k] you would have to pay a tax of 30% to cover your federal and state taxes. This means the long-term care event would cost you another $30,000.

Long-term Care Event Cost Tax on 401(k) withdrawal = Total Cost

$100,000 $30,000 = $130,000

But, guess what, we’re not done yet. Because you took $30,000 more out to net $100,000, now you have to pay 30% on the $30,000 also which is another $9,000. You see where this is going, ultimately that relatively modest $100,000 long-term care event will cost you an additional $43,000 if you’re only in a 30% tax bracket, for a total of $143,000. If you are in a 50% tax bracket the taxes would cost you another $71,000, for a combined cost for a $100,000 long-term care event of $171,000.

Lost Retirement Earnings

Notice I didn’t say full cost because we also have to take into account what happens over 20 years to your retirement savings if you pull out $143,000 from your 401[k] to pay for the care event and the tax burden. If we assume that you would be earning 3% on your money, over 20 years you and your family will have lost $258,000. If we return to the historical 6% rate of return, that would be over $500,000! With a typical $400,000 long-term care event, your retirement saving loss would be $1 million [4 X $258,000 = $1 million plus].

As you can see, the cost of an single long-term care event can be costly and taking into account the taxes and lost interest you will pay if you don’t have long-term care insurance is significant.

When addressing long-term financial security long-term care insurance should be an essential part of protecting yourself and your family.

Be sure to subscribe to our Seek On blog to receive every post in this series straight to your inbox!

Check out the other posts in our long-term care insurance blog series:

Long-Term Care Insurance: Getting the Facts

What is Long-Term Care Insurance?

Doesn’t My Health Insurance & Medicare Pay for Long-Term Care?

Long-Term Care Insurance Misconceptions Abound

Long-Term Care Insurance: “Bank Account” For Long-Term Care

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