Self-Funding Long-Term Care? That Could Be a Big Mistake

"I'm self-funded." I hear those two words from almost every successful retiree I meet, and I understand the instinct.

Nobody wants to spend their retirement thinking about nursing homes or memory loss.

But after 40 years of planning for retirees, I can tell you the real question was never whether you can pay for long-term care. It's what happens to your spouse and your children while you do.

What self-funding actually costs

Here's the math most people never run. Say a care need costs $10,000 a month, a realistic figure for assisted living or a home health aide today. That money typically comes out of a traditional IRA that hasn't been taxed yet.

To walk away with $10,000 after taxes, you might need to withdraw $16,000 to $18,000. Your income jumps, your tax bracket can shift, and your Medicare premiums rise with it.

Then there's timing. Care doesn't wait for a good market. If a health event hits during a downturn, you're selling investments at the worst possible moment, not because it's smart, but because the bills don't stop.

When adult children are managing the finances during a crisis, they don't always make calm decisions. I've sat across the table from families quietly watching an inheritance disappear, arguing about whether Mom "really needs" a higher level of care. That's not a position any parent wants to put their kids in.

About Adviser Intel

The author of this article is a participant in Kiplinger's Adviser Intel program, a curated network of trusted financial professionals who share expert insights on wealth building and preservation. Contributors, including fiduciary financial planners, wealth managers, CEOs and attorneys, provide actionable advice about retirement planning, estate planning, tax strategies and more. Experts are invited to contribute and do not pay to be included, so you can trust their advice is honest and valuable.

What changed one couple's mind

Let's consider a scenario with a couple I'll call Richard and Diane, a composite of a pattern I see constantly.

He's 67 and retiring, she's 66, and for three years, a couple like them tell me the same thing every retiree tells me: "We're self-funded." Large IRA, strong financial plan, long-term care nowhere on the radar.

What changes minds like theirs isn't a spreadsheet. It's Diane watching her own father need care. He had the money to pay for professional help and refused to spend it, so the calls went to his children instead.

Diane stepped up, and she saw firsthand what that looks like: The physical demands, the disruption to her own family, the exhaustion.

Her conclusion, one I hear versions of constantly: "There is no way I'm putting my kids through that."

That's the moment long-term care planning stops being a financial exercise and becomes something personal.

What Medicare will and won't cover

One of the biggest misconceptions I run into is that "Medicare will handle this." It won't, at least not the way people expect. Medicare might pay for a stay in a skilled nursing facility following a hospitalization, but that coverage runs out fast.

Around day 20 or 21, once care shifts from skilled to custodial, Medicare typically steps back, and the bill lands on you.

For a progressive condition such as dementia that requires years of care, Medicare offers very little.

The plan this structure solves for

Say Richard and Diane have a large IRA sitting untaxed, and Richard is approaching the age at which required minimum distributions (RMDs) would start. A common structure here is a custodian-to-custodian transfer, for example $280,000, from that IRA into a new IRA held at an insurance company.

That money funds a long-term care life insurance hybrid policy over 10 years, with the carrier adding roughly $65,000 in interest, bringing the total to about $345,000, distributed in equal annual pieces.

The policy would give them a current monthly benefit of slightly more than $6,000 for home healthcare, assisted living or nursing home care, available immediately if needed. That benefit typically increases 3% a year for two decades, so by the time they're in their late 80s, it has roughly doubled.

The benefit is unlimited in duration and paid out completely tax-free. Each spouse's benefit is entirely separate, so one spouse's claim never reduces what's available to the other. If neither of them ever needs care, there's a death benefit for their heirs.

There's a second benefit most people miss: The annual transfer from the IRA counts toward Richard's required minimum distribution once he turns 73, so a decision he had to make anyway now does double duty.

In this short video, I break down how such a structure plays out over a decade, RMDs included, if you'd like to see the numbers visually.

None of this was available to them by accident. Long-term care insurance requires underwriting, and Richard and Diane could still qualify because they had this conversation while they were healthy. Wait until a diagnosis arrives, and you might not qualify at all.

Wait five years because you're not ready to think about it, and the policy will likely cost more, with no guarantee you'll still be insurable. Most people I meet after a health event no longer have that option.

I want to be straightforward: A policy such as this doesn't cover every dollar of every care scenario, and costs will keep rising. But having $10,000 or $12,000 a month arriving tax-free changes the equation. Your children aren't scrambling for cash, and your surviving spouse isn't draining their own resources.

There's no investment strategy that replicates that kind of advantage. You can't self-fund an unlimited benefit. The math doesn't work.

Looking for expert tips to grow and preserve your wealth? Sign up for Adviser Intel, our free, twice-weekly newsletter.

Three steps to take now

1. Run the real numbers on what self-funding a $10,000-a-month care need would cost you in taxes and IRMAA surcharges, not just the sticker price.

2. If you're in your 60s and in reasonably good health, get a hybrid long-term care quote now. Underwriting only gets harder from here.

3. Talk to your spouse and adult children about who would provide care if no plan existed and whether that's a role you want them in.

You don't put a long-term care plan in place for yourself. You put it in place for the people who love you enough to show up when things get hard, so that showing up never becomes their full-time job.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.