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.
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:
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.
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:
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:
Risks and Limitations
While powerful, NQDC plans come with important considerations:
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:
Diversifying across these tools helps manage both income needs and healthcare-related risks in retirement.
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:
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.