Often, folks want to protect hard-earned assets from the costs of health care as they age. They fear expensive assisted living and nursing home care costs. Though the fears are well founded, the first step is to understand the exact potential costs, or the costs as close as actuarily determinable. With an understanding of out-of-pocket costs, a savvy consumer is better prepared to determine the nature and extent of planning strategies that might be necessary. 

Before fancy trusts and gifting, before engaging attorneys, before buying insurance, put pen to paper to determine if your financial plan can sustain the cost.

The planning strategies available to address long-term care costs center on either qualifying for Medicaid—a government program that provides free or low-cost health coverage to low-income individuals—sooner, or protecting assets from being used for care, or both. But these strategies also come with trade-offs and might be at odds with other goals. For example, a strategy that works to protect assets from health care costs might increase income tax exposure. Which is more important—taxes or health care costs? 

We need to put some math behind the question to come up with an answer and that is accomplished through financial planning. For many clients with higher income or assets, long-term care planning often takes a backseat to tax planning.

It's important to recognize that the strategies available can have a cost to set up, a cost to administer, and they largely benefit the heirs. On the last point, if a parent is trying to preserve the assets of the estate, he or she is doing it to increase the children's inheritance, not necessarily to keep any money in the parent's pocketbook.

Trusts might help, but they can be costly and an administrative hassle—again a trade-off. Financial planning tells us with some degree of certainty the need for trusts or other advanced Medicaid planning to more quickly qualify for government assistance. So let's look to financial planning.

What is the cost of care? To understand the total cost of care, the financial plan must use some inputs on the cost of care per month and the length of care. Different publications report costs and timeframes differently. According to the Genworth 2023 Cost of Care survey, the national average for assisted living is $5,350 per month and slightly higher for Washington state, at $6,138 per month. The specific location in Washington also matters, as facilities in King County, for example, generally charge more than facilities in Eastern Washington. If nursing care is required, the monthly average national cost almost doubles to $9,733 for a private room.

One study in the Journal of the American Geriatrics Society from 2010 found that the mean stay in a nursing home for older adults was 13.7 months, but the median stay was just five months—recognizing that a relatively small number of people had long lengths of stay skewing the mean. The National Center for Health Statistics pegs the average at 485 days, according to a 2019 publication.

Of course, there are different levels of care and both paid and unpaid, such as family care services, that one might use. A financial plan can customize the inputs as desired, but let's peg the potential cost at $8,000 a month and the timeframe at two years. That is $96,000 a year for two years. It's large sum of money, to be sure. But what then are the assumptions regarding income and assets?

Any monthly cost should be taken against income to result in the net monthly need. Assume, for example, a person has a Social Security of $2,500 a month and a pension or an IRA required minimum distribution of $2,500 a month for a total income of $5,000 per month. Then the amount not covered by current income is $3,000 a month for two years in our scenario, for a cost exceeding income during the two-year time period of $72,000.

In my scenario above, the out-of-pocket cost is $72,000. Now, let's look to net worth to determine whether the assets, versus the income, can cover that expenditure. Assume a person has a house value at $500,000 and bank and investments of $500,000 in this same scenario. It appears then that this individual can cover the likely cost of long-term care without either significant cost to heirs and without employing more expensive and sophisticated strategies. But the decision is personal.

In any event, armed with the analysis of cost and assets available, a consumer is in a position to determine whether long-term care planning is cost effective or even necessary.

Beau Ruff is an attorney and director of planning at Cornerstone Wealth Strategies Inc., in Kennewick, Washington.