Retirement plans commonly fold an average long-term care (LTC) assumption into the withdrawal rate, but lifetime LTC cost is not distributed around its average. It is heavily right skewed: roughly half of retirees incur nothing, while a substantial minority incurs catastrophic multi-year expense.1
Planning to the mean therefore errs in both directions at once, overfunding the majority and underfunding the high-need tail in the case of a genuine multi-year event.
Advisors routinely translate long-term care risk into a single planning number: an expected lifetime cost or an add-on to the assumed withdrawal rate. The appeal is operational, as one figure drops cleanly into a plan, and the US Department of Health and Human Services (HHS) provides summary statistics that make plausible candidates. HHS estimates that a person turning 65 today has a remaining life expectancy of roughly 20.5 years, that about 56% will develop a significant disability requiring long-term services and supports (LTSS) at some point, and that the average LTSS need lasts roughly 3.1 years and carries an average lifetime cost near $120,900.1 The problem is that this average summarizes a distribution almost no individual actually experiences.
The distribution is not merely wide; it is skewed to the point of being uninformative at the mean. HHS modeling projects that roughly half the cohort (50.7%) will incur no LTSS cost at all, while 14.7% will incur more than $250,000.1 The $120,900 average lands in the valley between these two peaks, not at all describing the modal retiree, and depicting the high-need retiree poorly.
Two features deserve emphasis. First, the single most likely outcome is zero. Second, the tail is genuinely catastrophic in current dollars. The 2024 Genworth/CareScout Cost of Care Survey put the national median at $127,750 per year for a private nursing-home room and $111,325 for a semi-private room.2 At those rates, a three-to-five-year stay, which is well within the range the high-need cohort experiences, runs from roughly $380,000 to $640,000 before any future cost inflation.3
Capitalizing an average LTC cost into the withdrawal rate asks every client to fund the mean. For the majority who never incur substantial cost, that provision is a permanent, compounding reduction in spendable income and terminal wealth. For the high-need tail, the identical averaged provision is inadequate: a multi-year event runs to a multiple of the blended figure, not a rounding adjustment to it. The problem is not that the average is calculated incorrectly, it is that no single figure can simultaneously fund a $0 outcome and a $250,000-plus outcome. Splitting the difference produces a number that fits the small minority near the middle of the distribution and misfits nearly everyone else. A distribution this skewed has to be planned as a distribution, not compressed to its mean.
The Structural Fix: Segregate the Tail
A risk that is low in frequency and high in severity is the classic case for transfer rather than self-funding out of the base plan. This is the same logic that leads a homeowner to insure against a fire that will probably never come rather than to reserve its full cost. The Center for Retirement Research has made the point directly in the LTC context: when the probability of extreme need is on the order of one in four and the associated cost is very high, insurance is the instrument the situation calls for.4 That coverage can take the form of a traditional stand-alone LTC policy, a hybrid life-and-LTC, or an annuity-and-LTC product; the specific vehicle matters less than the fact that the tail is being transferred rather than absorbed.5
For clients who cannot qualify for coverage or decline to purchase it, the alternative is a reserve earmarked explicitly against the tail event and held outside the withdrawal-rate calculation, not a spending haircut spread across every year of the plan. Either way, the treatment is the same in principle: a heavy-tailed risk is handled discretely, as its own line item, rather than averaged into the base case. HHS's own modelers reach the same conclusion, noting that sound LTSS planning has to prepare for the rare, financially catastrophic case as deliberately as for the typical one.1
The average long-term care cost is a planning convenience that corresponds to almost no individual retiree's experience. Treating the tail as a distinct, insurable risk (or, absent insurance, as a separately reserved one) rather than a rounding adjustment to the withdrawal rate produces a plan that is honest about both the majority who will need little and the minority who will need a great deal.
Important Disclosures & Definitions
1 Johnson, R. W., & Dey, J. (2022, revised). Long-Term Services and Supports for Older Americans: Risks and Financing, 2022. Office of the Assistant Secretary for Planning and Evaluation (ASPE), U.S. Department of Health and Human Services. Distribution figures from Table 7 (all payers; sum of LTSS expenditures, age 65 to death, 2020 dollars). Updates Favreault, M., & Dey, J. (2016)
2 Genworth & CareScout. (2025, March 04). Genworth and CareScout Release Cost of Care Survey Results for 2024. Genworth, Investor Relations.
3 Family out-of-pocket totals are lower on average, because Medicaid absorbs costs once a retiree has spent down to eligibility; but for a client planning to preserve assets rather than spend into Medicaid, the relevant figure is the private cost of care, not the Medicaid-blended one.
4 Munnell, A. H. (2024, March 18). A Major Risk Facing Older Americans: The Need for Long-Term Care. Center for Retirement Research at Boston College.
5 Congressional Research Service. (2023, July 21). Long-Term Care Insurance: Overview (IF11614). Congress.gov
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