The Rising Cost of Long-Term Care: How NQDC Plans Can Power a Dual Income + Care Funding Strategy in Retirement

Long-term care is recognized as one of the most significant and least predictable expenses in retirement. As people live longer and healthcare costs continue to rise, many retirees find that traditional savings vehicles alone may not be enough to fully cover extended care needs. While programs like Medicare provide limited support, they often fall short when it comes to long-term custodial care, creating a growing financial gap that individuals must plan for in advance. One strategy that can help higher-income earners address this challenge is the use of a nonqualified deferred compensation (NQDC) plan to build additional tax-deferred retirement assets and potentially create a dual-purpose funding approach for both income and long-term care protection.

Key Takeaways

• Long-term care costs continue to rise faster than inflation, and Medicare generally does not cover extended custodial care, leaving many retirees with a significant funding gap.
• Long-term care expenses can quickly strain retirement savings, making it essential to plan for healthcare and longevity risk as separate from standard income replacement needs.
• NQDC plans allow eligible high earners to defer income and create a tax-advantaged pool of assets that can later support both retirement income and long-term care funding strategies.
• A coordinated approach, using NQDC distributions alongside retirement income and long-term care insurance, can help strengthen financial flexibility and protect against rising healthcare costs in retirement.

Rising Long-Term Care Costs

Long-term care includes services such as assisted living, nursing homes, and in-home support. These services are becoming increasingly expensive due to rising labor costs, growing demand from an aging population, and ongoing healthcare inflation.

Industry research commonly cited by organizations like AARP and cost benchmarks from companies such as Genworth Financial show that long-term care expenses can range from tens of thousands of dollars annually for home care to well over $100,000 per year for nursing facility care, depending on location and level of support required.

Why Medicare Isn’t Enough

Many retirees assume that Medicare will cover long-term care expenses. However, Medicare generally only pays for short-term skilled nursing or rehabilitation following hospitalization.

For extended custodial care, which is non-medical assistance for routine activities of daily living, individuals often rely on:

• Personal retirement savings,
• Family caregiving support,
• Long-term care insurance, or
• Means-tested assistance through Medicaid.

Medicaid’s means-tested assistance program typically requires spending down assets to become eligible, which may not be viable for retirees who wish to preserve wealth and financial flexibility.

The Retirement Funding Gap

Traditional retirement planning often focuses on replacing income, but long-term care introduces a separate, unpredictable, and potentially substantial expense. The combination of risk, healthcare inflation, and the possibility of extended care needs can quickly strain even well-prepared retirement portfolios.

Using an NQDC Plan to Bridge the Gap

An NQDC plan allows eligible employees, typically executives or highly compensated professionals, to defer a portion of income until a future date, often retirement. These plans create an additional tax-deferred pool of assets that can be strategically used alongside other retirement savings.

Beyond supplementing retirement income, NQDC distributions can play a dual role in long-term care planning.

Dual Strategy: Income + LTC Protection

A portion of NQDC plan distributions in retirement can be directed toward two complementary goals:

1. Funding Long-Term Care Insurance Premiums
Retirees can use scheduled NQDC distributions to help pay ongoing premiums for long-term care insurance policies or hybrid life/LTC products. This helps:

• • • Maintain policy coverage during retirement,
    • Reduce pressure on core retirement accounts, and to
    • Create a dedicated funding stream for LTC protection.

2. Providing Supplemental Retirement Income
The remaining portion of distributions can be used as Supplemental retirement income.

This dual approach effectively turns the NQDC plan into both:

• A retirement income enhancement tool, and
• A long-term care risk management funding source.

Risks and Limitations

While powerful, NQDC plans come with important considerations:

• Assets are subject to employer credit risk,
• Distribution timing is limited and often pre-set at election, and
• Less liquidity compared to taxable investment accounts.

Because of these constraints, NQDC plans should be viewed as a supplemental strategy rather than a primary funding source.

Building a Comprehensive Strategy

A well-rounded long-term care and retirement plan typically combines multiple resources:

• 401(k) and IRA savings for core retirement income,
• Taxable accounts for liquidity and flexibility,
• Long-term care insurance or hybrid policies for risk transfer,
• Health Savings Accounts (HSAs), when available, for tax-advantaged healthcare spending, and
• NQDC plan deferrals for high-income earners seeking additional tax-deferred accumulation.

Diversifying across these tools helps manage both income needs and healthcare-related risks in retirement.

Final Thoughts

Long-term care costs continue to rise and remain one of the most significant challenges in retirement planning. While Medicare and Medicaid provide important safety nets, they do not fully address the financial burden of extended care for most retirees.

For eligible professionals, an NQDC plan can be a valuable tool not only for supplementing retirement income but also for funding a dual-purpose strategy, supporting long-term care insurance premiums while also providing additional income flexibility in retirement. When integrated into a broader financial plan, it can help strengthen resilience against rising healthcare and longevity costs.

Why Now Is the Time to Learn

Even if you did not enroll in the last period, understanding deferred compensation now allows you to:

• Evaluate whether it aligns with your financial goals.
• Coordinate future deferrals with other income sources.
• Approach the next enrollment period with clarity and confidence.

Nonqualified deferred compensation is not a solution for everyone, but for executives facing increasing tax complexity, it can be a powerful tool for managing income timing and taxes. Taking the time to learn now sets the stage for informed, strategic decisions when the next enrollment window opens.

Now is the time to learn, plan, and be prepared.

This content is for informational and educational purposes only and does not constitute tax, legal, or investment advice. Nonqualified deferred compensation (NQDC) plans are subject to Section 409A of the Internal Revenue Code, which establishes strict requirements governing plan design, deferral elections, and distribution timing. NQDC plans are unfunded, unsecured obligations of the plan sponsor, and any investment options referenced involve risk, including the possible loss of principal. We encourage you to consult with your tax, legal, and/or financial professionals regarding your plan's specific circumstances.