Rethinking Retirement: Funding Long-Term Care with Defined Contribution Plans

As life expectancy increases, one of the most significant financial risks facing retirees is the staggering cost of nursing home care. A new white paper titled "Optimizing Retirement Financial Strategies" explores how Americans can better utilize their 401(k) and Defined Contribution (DC) plan assets to prepare for these late-life expenses.

The Looming Challenge of Long-Term Care

The financial landscape for long-term care (LTC) in the United States is precarious. Nursing home costs now exceed $100,000 per year, yet approximately 70% of individuals over age 65 will require some form of care during their lives.

Contrary to common belief, Medicare does not cover these long-term costs. Furthermore, Medicaid only steps in after a retiree has exhausted nearly all their assets, and the market for private long-term care insurance is shrinking due to high premiums and administrative issues⁴⁴⁴⁴. This leaves most Americans to self-insure, often relying on the $29 trillion currently held in DC plans and IRAs.

The Role of Deferred Annuities

The study investigates whether retirees should keep their 401(k) assets liquid or convert portions of them into lifetime income streams, specifically using Qualified Longevity Annuity Contracts (QLACs). These financial products allow retirees to defer benefit payments until later in life (up to age 85), offering a potential safety net for late-life health shocks.

Recent legislation, including the SECURE 1.0 and 2.0 Acts, has made these options more accessible to plan sponsors and retirees.

Key Findings: One Size Does Not Fit All

The authors used a dynamic life cycle model to determine optimal strategies. A crucial takeaway is that the "optimal" strategy depends heavily on a retiree's level of education and accumulated wealth.

• For Higher-Educated Retirees:

Those with higher levels of education and greater wealth benefit significantly from annuitizing a portion of their 401(k) assets. The study suggests that for this group, purchasing deferred annuities that begin payments at age 80 is optimal. This strategy allows them to pool longevity risk and protect against the high costs of living longer than expected.

• For Less-Educated Retirees:

Conversely, retirees with less education and lower financial wealth are advised to keep their assets liquid. This group faces a higher statistical risk of entering nursing homes at earlier ages and having lower life expectancies. Therefore, they need immediate access to cash to cover unexpected health care costs rather than locking funds into a long-term annuity.

• Variable vs. Fixed Payouts:

The paper also compared fixed annuities with variable annuities (linked to market returns). The analysis found that variable payout annuities generally offer higher welfare gains for most retirees compared to fixed versions, providing a better balance of risk and reward.

Implications for the Industry

This research highlights the need for nuanced financial advice. While policymakers and insurers are keen to integrate lifetime income protection into retirement plans, the study demonstrates that these products are not universally beneficial. Financial institutions and advisors must consider individual health risks, education, and wealth profiles when designing retirement solutions.

By tailoring strategies to specific demographic needs, the financial industry can better help the Baby Boomer generation navigate the complex intersection of longevity, health shocks, and economic security.

Schedule an appointment to learn more about Qualified Longevity Annuity Contracts (QLACs) and long-term care.

Source: Horneff, V., Maurer, R., Mitchell, O. S., & Odenbreit, J. A. (2025). Optimizing Retirement Financial Strategies: Integrating Annuities, Defined Contribution Plans, and Long Term Care Costs.

Disclaimer: Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors and Synergy Wealth Management are separate entities.